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KEY POINTS
- Pension changes and anti-forestalling rules.
- Trust gains may be taxed at 18% whenever realised in 2010/11.
- Should returning non-residents arrive before 5 April 2011?
- Advance bonus payments to reduce National Insurance.
- Will loss relief on furnished holiday lets be restricted?
Most year-end tax planning checklists for personal tax clients look pretty much like each other: i.e. make sure you use your annual exemption for capital gains tax; maximise your ISA investments, etc.
However, for the current year ending 5 April 2011, there are several additional ‘once only’ opportunities to consider.
Pensions
Probably the most significant opportunity that will disappear after 5 April 2011 relates to the changes in the rules for tax relief on pension contributions.
Due to the anti-forestalling rules, it is only available to those taxpayers with income of less than £130,000 a year over the 2008/2009, 2009/10 and 2010/11 tax years and with the ability to make, or for their employer to make, significant contributions to their pension.
Typically these will be owner/directors of businesses. With this level of income the anti-forestalling provisions do not come into play and the level of contribution is governed by the annual allowance of £255,000.
After 5 April 2011, this allowance will reduce to £50,000. Mark Morton’s article Pensions by numbers provides detailed information on this subject.
Note that if such a contribution is made, the pension input period (PIP) will need to be closed before 5 April 2011. The PIP is the twelve-month period in which the member’s pension rights are assessed against the annual allowance.
It is possible to change the closing date of the PIP, but it will vary for each pension scheme.
Trusts and estates
For disposals following the ‘emergency’ Budget on 22 June 2010, trustees and personal representatives of deceased persons will pay capital gains tax at 28%.
However, where gains are taxable on a settlor under TCGA 1992, s 86 for 2010/11, they are treated as if they arose before 23 June 2010 even if they were made by the trustees on or after that date. There is, therefore, a window of opportunity for trusts to realise gains at the old rate of 18% until the end of this tax year.
My article Where are we now? provides more information here.
Returning non-residents
When a former UK resident resumes UK residence after being absent for less than five tax years, any capital gains arising on assets that were disposed of during his absence and which were held before departure are deemed to arise in the year of his return.
For 2010/11, such gains are treated as arising before 23 June 2010 even if he returns to the UK after that date. The gains will therefore be taxed at the flat rate of 18%.
So if a former UK resident (a higher-rate taxpayer) is due to return to the UK in the coming weeks and delaying the arrival until after 5 April will not increase the period of absence to five complete tax years, it is worth considering a return before 5 April to secure an 18% tax rate rather than 28% after that date.
Gift aid
The reduction of the basic rate tax band from 22% to 20% from
6 April 2008 would have had a significant effect on charities, because the amount available to reclaim from the government would have been reduced from 28% of the net gift to 25%.
To counter this loss of income for the charities, some transitional relief was introduced for three years whereby the charity received an extra 3% when they reclaimed the basic rate tax.
So although this does not affect the individual, a gift aid donation before the end of the 2010/11 tax year will provide more funds for the charity. Individuals making significant donations, perhaps to a charity they have established themselves, may wish to make the donation a little earlier than planned.
National Insurance contributions
There will be an across the board increase of 1% in National Insurance contributions. If a bonus is due to be paid shortly, a saving of 2% could be achieved by paying before 6 April 2011. That is 1% each for the employee and the employer.
Furnished holiday lettings
As a result of last year’s election, the proposed abolition of the favourable taxation rules for furnished holiday letting (FHL) income was postponed.
The new government has consulted on this matter and the likelihood is that this year’s Finance Bill will, among other things, include provisions that will restrict FHL loss relief so that it will no longer be possible to set such losses against general income.
Therefore, if significant expenditure is envisaged on a FHL business over the next few months, which would generate a loss, it is worth considering whether to incur that expenditure before the end of this tax year.
Readers may wish to refer to John Endacott’s article A hospital case.
The usual stuff
The last chance offers covered, the usual planning points should not be forgotten and some of these are as follows:
- Individual savings accounts – the maximum investment for 2010/11 is £10,200, of which £5,100 can be cash.
- If you have a company car and the employer pays for the fuel it may be worth reimbursing the employer for the private fuel element before 5 April 2011. For example, say the appropriate percentage for the car is 25%; the fuel benefit charge would be £4,500 (25% of £18,000). A higher rate (40%) taxpayer would pay £1,800 tax on this so if the actual petrol provided for private use is less than that, a reimbursement to the employer would be cheaper.
- If one spouse/civil partner has a much lower level of income than the other, consider transferring income-producing assets to the low income spouse/partner to maximise the use of the basic and higher-rate tax bands rather than the top rate of 50%. This can also be effective if one spouse/partner would otherwise have income between £100,000 and £112,950 where, because of the withdrawal of personal allowances, the marginal rate is 60%.
- The capital gains tax annual exemption £10,100. Remember that transfers between spouses and civil partners produce neither a gain nor a loss – the inherent gain or loss is effectively transferred with the asset.
- For those within the self assessment regime, the 2006/07 year will go out of date on 5 April 2011 so any late claims for relief for that year should be made by that date. For example, any higher rate relief on personal pension contributions for that year should be claimed by that date.
- For inheritance tax purposes, each individual has an annual exempt amount of £3,000 that can be given away. You can also use the previous year’s allowance if that has not been used. Additionally, regular gifts out of income can also exempt from inheritance tax.
- Also for inheritance tax, non-domiciled UK residents (non-doms) who have been resident for more than 16 out of the previous 20 years will become deemed UK domiciled. Non-doms who are currently in their 16th year of residence should consider establishing an excluded property trust by 5 April 2011. Such a settlement could put some assets outside the scope of UK inheritance tax.
It should not be forgotten that the Budget takes place on
23 March 2011, so some of these points could be considered
pre-Budget points rather than end of year planning.
Barry Hallam is a senior tax manager at Mercer & Hole chartered accountants. Based at their City office, Barry specialises in providing tax advice to private clients, particularly in the areas of capital gains tax and general tax planning for non-UK domiciled clients. He can be contacted by phone on 020 7353 1597 and via email.
