March Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue - March 08.

When you run your own company you have a certain amount of control over how much income you are personally taxed on in each tax year. The company is taxed on the profits it makes in each accounting year, but you don't have to draw those profits out in the same period. You probably take a basic salary from your own company and top-up your income needs with a bonus or a series of dividends.

Just before the end of the tax year is a good time to assess how much you have taken out of the company, and what your total taxable income will be for 2007/08. The threshold at which higher rate tax kicks in is £34,600, so assuming you are aged under 65 and have a personal allowance of £5,225, you can receive gross income of £39,825 in 2007/08 before you start paying tax at 40%.

To work out your gross income you need to 'gross-up' the dividends you receive from your company. Each dividend voucher should show the gross and net amount, but in case you have mislaid those vouchers, £1,000 of net dividend is equivalent to £1,111 gross. Your payslips should show the gross pay you have received and all the tax and NI deducted. You also need to take into account the value of any benefits in kind and interest you have received in this tax year. Interest from bank accounts is normally paid net of 20% tax, so for each £100 net you receive the gross equivalent is £125. Tot up all your different sources of gross income and benefits for the year, to see how much headroom you have before reaching the higher rate tax threshold of £39,825.

If you are about to exceed the 40% threshold, you could postpone issuing that next dividend so it falls after 5 April 2008 and in a new tax year. If you need the cash you could arrange for your own company to lend you up to £5,000 until after 5 April 2008, when it can be repaid with the issue of a dividend or bonus. As long as the total amount you borrow from the company at any one time is less than £5000, and you repay the amount borrowed within nine months of the company's year end, there should be no tax implications.

On the other hand if you have a good deal of headroom before hitting the 40% threshold, and the company has the available cash, it makes sense to withdraw dividends up to that threshold. If you don't need the income straight away you can invest it in your own name or lend it back to your company.

Newsletter issue - March 08.

Several important capital gains tax reliefs are being withdrawn at the end of this tax year on 5 April 2008, including indexation allowance which compensates for the effect of inflation on the value of your assets. In return for this simplification, capital gains made from 6 April 2008 will be taxed at a flat rate of 18% instead of your marginal tax rate of 20% or 40%. In spite of this tax rate reduction those who have held assets for ten years or more could pay more tax on a disposal after 6 April 2008, but it does depend on how much the asset originally cost.

Example:

You are about to sell some land you've held since April 1982. It has not been used for a business purpose, so the taper relief is 40% for a non-business asset. You also get indexation allowance to compensate for the effect of inflation from April 1982 to April 1998. We assume you have already used your annual exemption for 2007/08, so all the gain you make is taxed at your highest margin rate.

By delaying the sale you save tax of £11,712 (£191,712 - £180,000), but you lose the benefit of both the indexation allowance and the taper relief.

You can bank the indexation allowance by transferring the land to your spouse before 6 April 2008, who then sells it in the new tax year to take advantage of the lower tax rate. A transfer to a spouse or civil partner is treated as a no gain/ no loss transaction for capital gains tax purposes, so no tax is due on the inter-spouse transaction. The deemed cost of the land for your spouse includes the indexation allowance.

Example:

By making the inter-spouse transfer and selling in the later tax year you and your spouse pay tax of £143,784 on the gain rather than £180,000, a further saving of £36,216.

Points to note:

• This indexation saving trick only works when transferring the asset to a spouse or civil partner, a transfer to a sibling or unmarried partner will not work.
• The spousal transfer must be legal and complete. Land must be transferred by a deed, and shares must be recorded against the new owner's name on the company's share register.
• Complete the transfer to your spouse well before the asset is advertised for sale. If the sale negotiations start before the spousal transfer is done, the Taxman will say the transfer is an inserted step to reduce the tax payable, and will ignore the spouse transfer for tax purposes.
• Check whether the final tax saving is worthwhile before making the transfer. An asset with a low cost, or low base value in March 1982, will not attract much indexation.

Newsletter issue - March 08.

Taper relief reduces the taxable gain made on business assets by up to 75% and by up to 40% if the assets don't qualify as business assets. However, taper relief will also be withdrawn on 5 April 2008, which has annoyed those who are about to sell their businesses. The new Entrepreneurs' relief will partially restore the taper relief position where you are selling all or part of your business but this does not apply to everyone.

To qualify for entrepreneurs' relief on the sale of shares you have to own at least 5% of the company and be an employee or director of that company for at least a year. If you acquired your shares as part of an employee share scheme, or you don't work for the company, you will lose your taper relief (possibly at 75%) and won't get the entrepreneurs' relief. In order to bank your taper relief you need to sell your shares by 5 April 2008, but you may want to hang on to them, as they are a good investment.

In which case you could sell the shares but use one of the following strategies to reacquire a similar number and value of the same shares:

• After 30 days you buy back the same number of shares. You need to delay the repurchase by at least 30 days as otherwise your sale and purchase are matched for tax purposes and you can't take advantage of the taper relief. This is a risky strategy as you may have to pay more for the replacement shares if the share price has increased in that 30 day period.
• Ask your spouse to immediately purchase the same shares. They can then give those shares to you in a no-gain, no loss transfer.
• Ask the trustees of your Self Invested Pension Plan (SIPP) to buy the same shares as soon as you sell them.
• Ask the fund manager of your ISA to buy the same shares.

In the last two options (SIPP and ISA) you do not have direct control of the shares but you still benefit from their growth in value in the future.

Newsletter issue - March 08.

If you are like Bruce Forsyth and have deferred taking your state pension as you are happy working, you need to carefully consider the timing of when you do take up that pension. You have two choices when taking your deferred state pension:

• Draw an enhanced weekly pension; or
• Take a lump sum plus the normal weekly amount.

The enhanced weekly pension is taxable just like the normal pension. If you defer taking your pension until after 6 April 2008 you will have an increased tax free personal allowance of £9,030 (if aged under 75) to set against that income. However you need to estimate your total income for the tax year, as if it exceed £21,800 your age allowance will be reduced.

The lump sum pension payment is taxable at the top rate of tax you pay in the year you become entitled to receive your deferred pension, not necessarily the date when you actually receive the lump sum. So the date you claim your deferred pension could be crucial.

The lump sum is not added to your total income to work out your marginal rate. If the top tax rate you pay on other income is 20% (for 2008/09), then the full lump sum will be taxed at 20%. Similarly if your personal allowance fully covers all your other income so you pay no tax, the lump sum is taxed at a nil rate.

If you are planning to stop work and take your state pension, cease your earnings in 2007/08 then take your pension lump sum in 2008/09, and possibly defer your personal pension until 2009/10. In this way you will minimise the marginal tax rate in the year the lump sum falls into.

Newsletter issue - March 08.

Q. The Taxman has asked me about my rental income, but I've never made a profit from my let properties, so do I have to complete his form?

A. The Taxman is currently writing to people who he believes are letting properties, but that rental income is not shown on their tax returns. You do have to declare the rental income even if your interest payments and other expenses cancel it out to make a loss. You are not obliged to respond to the Taxman's letter, but if you don't things will only get worse.

Q. Is there anything I should do before the end of the tax year to save inheritance tax?

A. If you have not made any significant gifts of capital since 6 April 2007, you can give a total of £3,000 to individuals to use your annual inheritance tax exemption for 2007/08. If you did not make any similar gifts in 2006/07 you can give a total of £6,000 before 6 April 2008 and all those gifts will be exempt from inheritance tax. Make sure you leave enough time for your cheques to pass through the banking system before 6 April 2008, as otherwise the gifts will not be completed.

Q. Should I invest in an ISA now or wait until the new tax year?

A. The investment thresholds for ISAs are set for each tax year and cannot be carried over into the next tax year. The limit for 2007/08 is £3,000 for a cash ISA and the balance of up to £7000 in stocks and shares. These limits increase on 6 April 2008 to £3,600 and the balance up to £7,200 for stocks and shares. So if you don't invest before 6 April 2008 you have missed you 2007/08 ISA allowance, but you will have more scope with the higher investment limits in 2008/09.

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