FT: Last minute tax planning can still save investors a hefty bill

Last minute tax planning can still save investors a hefty bill
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:
Isas
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.
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