By Steve Lodge Financial Times Published: March 28 2008 15:57
With the end of the tax year now just days away, investors should brace themselves for a barrage of last-minute appeals to ³use or lose² their Isa and other tax-saving allowances.
But changes to income and capital gains tax from April 6 could also mean extra reasons to look to some areas of tax planning before next weekend, say experts.
While the cut in basic rate income tax to 20 per cent and the introduction of a flat 18 per cent capital gains tax (CGT) rate are generally good news for investors, some could be worse off. And compared to the relatively modest tax breaks on individual savings accounts, taking action on CGT before the tax year deadline could save thousands of pounds.
These are some of the schemes to consider:
Recent stock market turmoil has hit the take-up of equity individual savings accounts in the spring Isa ³season², according to investment firms. Three times as many cash Isas are being opened as equity Isas as savers run scared of share price volatility, says Virgin Money.
But for those yet to take up their stocks and shares Isa allowance up to £7,000 or £4,000 maximum for those with cash Isas in many cases it is possible to put cash in now but hold off from investing until later. This is a standard feature of stockbroker¹s self-select Isas, while Hargreaves Lansdown and Fidelity FundsNetwork also offer the same flexibility for investment fund Isas.
Experts say that those not planning to invest in a stocks and shares Isa should at least take out a £3,000 cash Isa. Even without the perk of tax-free interest these tend to pay some of the highest savings rates. Best-buys are currently offering 6 per cent-plus and many allow instant access.
Bond fund Isas also offer tax-free interest, while share-based Isas allow higher rate taxpayers to escape extra dividend tax and shelter all profits from CGT. And in many cases it costs no more to hold investments within an Isa than outside the tax wrapper is in effect free.
Many Isa providers allow investors to open plans right up until the evening of April 5. The annual Isa investment limit rises to £7,200 for 2008/9, of which £3,600 can go into a cash Isa. Experts say it is generally worthwhile taking up Isas as soon as possible in the new financial year to maximise tax benefits; currently investors can also buy into stock markets at relatively low levels. Isa offers aimed at last-minute investors are often extended into the new tax year as well. Pensions
Topping up a pension before April 5 is a key way for higher rate taxpayers to cut this year¹s income tax bill. For example, a £7,800 contribution into a Sipp or personal pension will be grossed up by basic rate tax relief to £10,000. Higher rate taxpayers can reclaim an additional £1,800 through their tax return. Overall this gives higher rate payers the benefit of 40 per cent upfront tax relief on their contributions.
Those funding pensions for non-earning spouses or grandchildren also have an incentive to contribute before tax year-end.
With the basic rate of income tax coming down from 22 to 20 per cent, basic rate relief is also pared back from April 6.
For higher rate taxpayers contributing to their own pensions that reduction will be offset by an increase in the additional relief they can reclaim up from 18 to 20 per cent.
But for pensions taken out for non-earning spouses or grandchildren it means the net cost of a full £3,600 contribution rises £72 from £2,808 to £2,880 in 2008/9.
Generally though, greater flexibility over the annual amounts that can be invested in pensions, £225,000 currently, £235,000 in 2008/9, means the tax-year deadline has become less important, says Tom McPhail, head of pensions research at Hargreaves Lansdown.
Very high earners wanting to ³max out² their pensions could use ³input period² rules to make even higher contributions of up to £460,000 this tax year, subject to the agreement of their pension provider.
But investors should also beware of over-funding. Those busting the ³lifetime allowance² for total pension funds £1.6m rising to £1.65m for 2008/9 face paying 55 per cent tax on the surplus. Young high earners are most at risk, says Phillip Wood, wealth advisory director at PricewaterhouseCoopers, because of higher contributions and likely higher investment growth given their longer timeframe to retirement. Capital Gains Tax
Encashing profitable investments to use up the annual tax-free allowance for capital gains, currently £9,200, is generally ³good housekeeping², says PwC¹s Wood. ³It¹s a good way of mopping up gains without creating a tax bill,² he says. ³It helps keep the tax position under control and minimises future taxable gains.²
This does not have to mean selling off investments altogether. ³Bed and Isa² and ³bed and Sipp² transactions selling existing holdings and buying them back through the tax shelter allow investors to crystallise share profits for CGT purposes while ringfencing any future gains from tax. As with a ³bed and spouse² selling and re-buying in the name of a spouse there is no requirement to be out of the market to be deemed to have crystallised a gain.
The changeover to the new flat 18 per cent rate of CGT from April 6 generally offers savings for private investors given that most are currently subject to tax rates of 24 to 40 per cent on gains.
But for those facing higher tax bills under the new regime including Aim and Save-as-you-earn (Saye) shareholders who currently pay just 10 per cent, as well as those losing ³indexation allowance² on longer term holdings it is particularly worth considering taking advantage of current reliefs.
As well as ³bed and Sipp² type transactions, there may also still be time to transfer assets bought before 1998 to a spouse or civil partner to lock in the benefit of the accumulated indexation allowance before it is scrapped.
Called a ³spousal gift², the preserved allowance can then be used with the new 18 per cent to reduce any future CGT bill. But Wood says couples will need to move quickly: it should still be possible for a share switch to be actioned by April 5 with a simple stock transfer form, but other assets such as property might prove more problematic. VCTs and EISs
Isas give no upfront tax relief and pensions tie up cash until retirement.
By contrast, venture capital trusts and enterprise investment schemes combine upfront income tax relief and other tax breaks with more limited lock-ins albeit at higher risk.
Both invest in start-ups and other risky small companies. While VCTs have proved popular in the past, raising £700m two years ago when they offered 40 per cent upfront tax relief, the balance of attractions between the two schemes has changed, says John Davey, research analyst at Bestinvest, the investment adviser.
VCTs still give 30 per cent income tax relief against just 20 per cent on EIS schemes. But a big attraction of EIS investing, say experts, is the ability to defer CGT on previous gains.
Gains from the past three years taxable at rates of up to 40 per cent can be ³rolled over² into EISs. Then, under the new lower rate of CGT from April 6, investors would only be liable for 18 per cent tax when they exit the scheme.
From the new tax year, investors will also be able to put up to £500,000 into EISs rather than £400,000 currently. Monies previously going into film investment schemes using ³sideways loss relief² to cut income tax bills could now migrate to EISs and VCTs, say experts. These film schemes, which created trading losses that could be offset against other earned income, were shut down in the Budget.