Income tax strategies for high earners and entrepreneurs

Thursday, December 09, 2010 | Posted by: Sue Knight
Categories: Business, Protecting your wealth | Tags: tax, tax planning, property, capital gains tax, CGT, income tax, Sue Knight, pensions, income, reduce, minimise, investments, strategies, savings, personal, Finance Bill 2011, wrapper

The publication of draft clauses for the Finance Bill 2011 is imminent and no doubt there will be opportunities for some and disappointment for others. One thing is certain: the 50% income tax rate for those with incomes over £150,000 is likely to be with us for the foreseeable future, putting income tax reduction on the agenda for many. Although it has been interesting to hear a number of politicians from different parties talking about it as a ‘temporary tax’.

In the meantime, there are still opportunities for taxpayers to organise their affairs to reduce the income tax burden, which may help to soften the impact of tax rises.

For the high earner…

• If you’re married, you may want to consider transferring income-producing assets to a non-working spouse to make sure that your spouse’s personal allowance and basic rate tax bands are being fully utilised. This could save you, as a couple, more than £10,000 if you are a higher rate taxpayer and even more if you are paying tax at the additional rate of 50%.
• Consider making investments where the return is structured as capital and subject to capital gains tax (CGT), at maximum rates of 28% rather than an interest return, which is taxable at rates of up to 50%. While the differential in CGT and income tax rates is no longer as great as it was until 22 June 2010, it still provides a tax saving of 22%.
• If you do not need your investment income or gains, then consider using a tax wrapper, such as an investment bond or protected cell company, to defer tax liabilities until such time as you need access to the income or gains.

If you’re an entrepreneur…

• Shareholders of privately owned companies could consider extracting funds of £10 million or more as capital gains rather than income, thus benefiting from a tax rate of between 10% and 28% (or less if the base cost of the shares is high or personal capital losses are available) rather than an effective rate of 36% on a dividend.
• Investment assets in a company, such as property, could be moved into a structure that enables the CGT rates (up to 28%) to be accessed on any future growth (as compared to 54%). This can be achieved without crystallising any tax charges and without necessarily disrupting existing finance arrangements, thereby saving 26% tax.

The taxman has employed a number of tactics to scare taxpayers away from tax planning, but it is important to remember that unlike tax evasion, tax planning is not illegal.

Taxpayers have a right to arrange their tax affairs in order to minimise their tax bill, just as the HMRC has the right to challenge this where it believes the letter and spirit of the law has not been applied correctly.

The key is to ensure that appropriate tax advice is taken and that any planning arrangements put in place are robust and will stand up to close scrutiny by the taxman.
As always, I am pleased to take questions about tax planning and to hear your views.

To find out how Grant Thornton can assist with your personal financial matters, please visit our Private Client page or contact Eric Williams, National Head of Private Client on +44 (0)121 232 5171 or email eric.williams@uk.gt.com

Image: © Alan Cleaver/Flickr

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