10 strategies for tax planning in 2009

Monday, September 07, 2009 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax planning, inheritance tax, income tax, Sue Knight, income, trusts, tax planning solutions, taxable income, high income

The Budget 2009 announcements of the changes affecting high income individuals have brought tax planning into focus. On earned income, with the planned increase in the rate of national insurance contributions from April 2011, the effective rate of tax suffered could be as high as 61.5% on some slices of income.

Here are 10 common scenarios and some tax planning solutions…

1. Income above £150,000? This will be taxable at 50% with effect from 6 April 2010 so you could consider making investments which give rise to capital gains, which are taxable at 18% rather than an interest return, taxable at rates of up to 50%.

2. If you’re married… consider transferring income producing assets to a non-working spouse to make sure that your spouse’s personal allowance and lower tax bands are being fully utilised, as this could save you, as a couple, £10,070 in the 2009/10 tax year.

3. Looking to extract profits from a business? If you don’t want to keep large cash balances in the company given the current economic climate, then rather than considering the conventional options of bonuses, dividends or contributions to an approved pension scheme, perhaps investing in an Employer Financed Retirement Benefits Scheme (EFRBS) could be considered.

This is an unapproved pension arrangement and therefore it doesn’t have the same tax treatment as an approved pension. Contributions into the pension pot are not taxable or subject to national insurance on the employee although corporation tax relief is not generally available on contributions and there may be inheritance tax implications as a result.

The fund itself does not enjoy the same tax privileges as an approved scheme, but there will be flexibility over how the fund is invested. An EFRBS also provides a pension pot, which is currently only taxable at 40% on death or when benefits are taken. This compares favourably to the combined 82% tax rate, which can apply to the fund on death with some approved pension schemes where benefits have not been taken by age 75.

4. Have shareholders to please? If a company has cash balances which it wishes to invest, then it is possible to structure this so that shareholders benefit from the more favourable capital gains tax rates (18%) on any investment growth. This avoids unnecessarily extracting profits from a business and suffering a combined effective tax rate of 46% rising to 54% post 5 April 2010.

5. Other assets… This idea also works for assets such as property, equities etc sitting on a balance sheet. In the future if the property is sold and the proceeds extracted from the company by way of dividend, the effective tax rate would be 46% (54% post 5 April 2010).

Shareholders may want to consider moving the property into a structure which enables them to access the more favourable capital gains tax rates (currently 18%) on future growth. This should be achievable without crystallising any tax charges and without disrupting existing finance arrangements.

6. Inheritance tax (IHT) is often an emotive topic. With the new 50% income tax, and a further 40% IHT on death, the overall effective tax rate rises to 70% on retained income (or more in certain circumstances). Many will see this as a step too far. But what can be done?

You can give away money before you die, but bear in mind that the thresholds are limited. Each person can give £250 a year to any number of recipients, as well as £3,000 annually over and above that. You can also make regular gifts out of your income (not capital) that should fall to be exempt.

7. Death benefits from personal pension plans and life insurance policies can be written in trust, so that any benefits paid don’t fall into your estate, thereby saving 40% IHT on these amounts.

8. More on trusts… With careful structuring, it is possible to settle more than the nil rate band (currently £325,000) into trust without crystallising an immediate 20% IHT charge, while retaining access to the income during your lifetime.

9. Gifts (and the seven-year rule) – it is also possible to make a gift without needing to survive the usual seven-year period, which is useful for those who have left their planning to the last minute or for those who need to plan sooner than they expected.

10. Access to capital… Finally, it is possible to undertake planning which allows access to income and capital throughout the individual’s lifetime but the capital falls outside of the estate for IHT purposes, thereby saving 40% IHT. This provides maximum control over, and access to, the capital.

The above strategies will not always be appropriate and the best course of action will depend on your personal circumstances. Before undertaking any planning of these natures, you should take proper tax and financial planning advice.

Image: © Ansik, 2006