There doesn't seem to be any way left for me to cut my tax. Do I just have to bite the bullet and cough up?
To a certain extent, yes. But there are still some schemes you can use, and some planning you can do which should ease the burden.
Be sure to make the most of your allowances. Everyone has an annual personal allowance of £4,745 for 2004/5, rising to £4,895 in 2005/06. Income up to your personal allowance is free of tax.
Your accountant will tell you that it is particularly important for non-working spouses and children to use these allowances as well as your starting and basic rate tax bands if possible. The starting band is the first £2,020 of income over and above your personal allowance and on this you are taxed at just 10 per cent.
Another common wheeze is to move income-producing assets within your family so that the family as a whole takes reaps the benefit of all the available allowances.
What do you mean? I don't want to hand over my worldly wealth to my spouse.
Well, you can use your children's annual exemptions as well as your wife's or husband's. For example, if you move assets to your children by means of a “bare trust” any gains belong to the child, who can then use his or her annual capital gains tax exemption and thereby avoid paying CGT on the first £8,200 (for this tax year) of any gain.
Great but I'm rather more interested in tax breaks for me. Are there any?
There are still a number of schemes and investment vehicles that can be used to lower your tax bill. However, no scheme should be considered fool-proof as the Revenue and government have clamped down, restrospectively, on what they regard as illegitimate tax avoidance.
OK, I heard the health warning. Now tell me about the schemes.
There's not enough space to go into all of them, but here are some examples.
Some tax experts suggest that company directors use the so-called “lend-a-bonus” scheme. This means taking a bonus then lending it back to the company. Commercial rates of interest can be charged on the loan and, since national insurance contributions are not payable on interest, directors can gain a NIC-free fund of income from the company.
Although there has been a clamp down on many schemes used to reduce inheritance tax there are still legitimate ways of cut how much tax your heirs will pay when you die.
Nil-rate band discretionary will trusts using an IOU, for example, are still recommended by accountants.
This means writing a debt clause into the will, which settles a debt owed by the surviving spouse into a trust. It is a way of avoiding IHT while allowing the surviving spouse to use the assets, and can save up to £105,200 of IHT.
And what about investing with tax breaks?
There are some investments which have genuine tax breaks attached, and others which it may be tax-efficient for you to include in your portfolio.
The no-brainers are to make use of your Individual Savings Account allowance you can shelter up to £7,000 annually into a stocks and shares ISA but you should also consider other tax-efficient investments like National Savings Certificates.
From April, Child Trust Funds will allow parents and others to top up these funds by £1,200 a year. The income from these will be free of income tax for both the child and the parents, but the funds must not be touched until the child reaches age 18.
And don't forget your pension. In effect, for a net cost of £1 to you, the government's contribution (in the form of income tax relief) means your fund receives £1.66, assuming you pay tax at 40 per cent.
There are also savings on National Insurance where money is being paid into a company pension.
All good stuff. But what if I'm feeling really adventurous?
How about buying a forest? There are tax advantages to buying woodland. Income from commercially-managed forests is exempt from income tax, and CGT is only paid on profit from the sale of the bare land. If the asset is owned for more than two years, the value of the forest will qualify for 100 per cent business property relief from IHT.
For racier investments, how about Enterprise Investment Schemes shares? If you've got some capital gains from other investments hanging around, this CGT gain can be deferred if you invest in Enterprise Investment Schemes shares. You can get 20 per cent income tax relief on investments up to £200,000 in each tax year if, broadly, you own no more than 30 per cent of the company. If you qualify for income tax relief, your EIS shares will also be exempt from CGT on sale after three years (although any deferred gain comes into charge on sale).
And then there are venture capital trusts. Although past performance of these funds has been mixed, the tax breaks are generous. People who subscribe up to £200,000 for shares in a VCT and retain ownership for three years will receive 40 per cent income tax relief on the initial investment (up to April 2006 when the rate of relief will revert to 20 per cent).
You also get exemption from income tax on dividends and exemption from CGT on disposal of the VCT shares themselves.
