Food for thought: 2010-11 Tax Planning

The issues raised in this draft note may or may not survive the election, but a few minutes reading this draft briefing may point you in the right direction for action this year. Please give your usual Buzzacott contact a call if you have any queries.

2010-11 Post Budget Tax Planning

For the past few months we have been talking to clients about things they might do to bring income which would otherwise be taxed for 2010/11 at rates of up to 50% into 2009/10 and a top tax rate of 40%. Many people – salaried, fixed share, pensioners amongst them – were not able to take up the potential savings because they had no influence over the timing of income. Now we can address steps you might take now to reduce your 2010/11 liability, and also address some of the changes announced in the 2010 Budget.

For all clients one thing is now certain – tax rates on current income are up to 50%, with some taxable income in effect taxed at 60% (between £100,000 and £112,950). This is because personal allowances are now scaled back by £1 for every £2 taxable income exceeding £100,000. If your income falls into this band, pension contributions and gift aid donations can reduce your taxable income, thus in effect qualifying for 60% tax relief.

In passing, changes announced in the Budget which extend Gift Aid tax relief to qualifying donations within the EU, Norway and Iceland have been enacted.

Obtaining maximum relief on pension savings

A great deal of care needs to be taken to ensure that you will obtain maximum tax relief on your pension savings – excess contributions, employer contributions and a change in your job or potentially even a promotion could mean that if you earn or have earned more than £130,000 a year you become subject to the £20,000 cap on contributions this year, while next year we will see the gradual erosion of higher rate tax relief for those on incomes of between £150,000 and £180,000, with those with income over £180,000 receiving only basic rate tax relief.

Other news for savers confirms the increase in the ISA investment limit for all for 2010/11 to £10,200, of which up to £5,100 can be invested in cash. For 16 and 17-year-olds, the limit is £5,100, all to be invested in a cash ISA.

Home buyers

For those intending buying a new home, the Stamp Duty Land Tax (SDLT) holiday period for first time buyers runs until 24 March 2012. Subject to conditions, there is no SDLT to pay where the consideration does not exceed £250,000. At the other end of the scale, a new 5% SDLT rate will apply in respect of residential properties costing more than £1 million, from 6 April 2011.

Inheritance Tax frozen

The Inheritance Tax threshold was expected to rise to £350,000 for 2010/11. Instead, the threshold has been frozen for 2010/11 and to 2015 at £325,000. Tax is payable at 40% when death estates exceed the threshold.

Life insurance

Those who might have arranged a certain type of life insurance policy (often referred to as “investment bonds”) may have paid tax over the years, as withdrawals have exceeded the annual 5% limit. On final surrender, there may be a net value less than the original sum invested and so a “loss” arises. For tax purposes this is dealt with by “corresponding deficiency relief”, in effect, giving a deduction against current tax for tax “overpaid” in the past, and is given at the current year’s marginal rate. The government announced that, if appropriate, the relief will be given at the new 50% top rate, even though tax has been paid at only 40% in the past. However, anti-avoidance measures will be put in place to restrict the relief in some circumstances.

“Managed payment plans” for businesses

Those in business may already have taken advantage of HMRC’s original “time to pay” arrangements – allowing payments of self-assessed taxes to be spread beyond the normal due date, with interest charged but no penalties. They, and others, may be interested to note that HMRC will be introducing “managed payment plans” from April 2011, which will allow payments by direct debit to be spread, typically over the six-month period in which the due date falls.

Specifically for businesses

Those in business still have the opportunity to act to reduce the impact of the new top rates of income tax – it is not too late to think about:

• a change of year end
• forming a partnership
• incorporation
• introducing corporate members to a partnership or LLP
• delaying profit extraction

CGT Entrepreneurs’ Relief increased

The CGT Entrepreneurs’ Relief limit was increased to £2 million with effect from 6 April 2010. The Relief brings the effective rate of CGT on qualifying gains down to 10%. The limit is a lifetime limit – where gains to 5.4.10 exceeded £1,000,000, only new gains (those realised after 5.4.10) count against the increased limit.

Annual Investment Allowance doubled

The Annual Investment Allowance, which enables businesses to claim a year one write-off for certain capital expenditure, was doubled in the Budget to £100,000. Only a small number of businesses are believed to spend more than £50,000, but for those businesses which do the increased allowance will be available on a pro-rata basis for Financial Year 2010/11 and in full thereafter.

Note: This Insight has been drawn up based on Budget 2010 announcements and the Finance Act 2010, which passed into law on 9 April 2010. The points are subject to change (possibly back-dated to 6 April 2010) after the 6 May 2010 General Election. Before any action is taken or refrained from you should therefore consult your usual Buzzacott contact to get an up to date opinion on the law as it stands and on changes we anticipate being made.

This document is prepared to keep readers abreast of current developments, but is not intended to be a comprehensive statement of law or current practice. Professional advice should be taken in light of your personal circumstances before any action is taken or refrained from. No liability is accepted for the opinions it contains, or for any errors or omissions