Personal tax planning ideas to action before 5 April 2011

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Here are a few personal tax planning ideas that you might like to consider before the end of the current tax year, 5 April 2011.

ISA allowance – Although it may not always seem that significant, the tax free environment of an ISA still remains attractive. The allowance for 2010/11 is £10,200 (of which £5,100 can be invested in cash).

Pension contributions – Pension contributions have been one of the most popular methods of year end tax planning for many years. However, with the current anti-forestalling provisions, the reduction in the annual allowance from April 2011 (and associated transitional provisions) and the reduction in the lifetime allowance from April 2012, extra care needs to be taken at this time.

Income splitting – Ensuring each spouse’s personal allowance and lower rate tax bands are fully utilised is another key consideration, particularly following the introduction of the additional rate of income tax at 50% for those with higher earnings. Arranging income producing assets between spouses to ensure that both fully utilise their personal allowance and lower income tax bands each year can prove very worthwhile.

Charitable giving – Assuming you are a higher rate or additional rate taxpayer, you will be able to claim additional tax relief on charitable donations. For a higher rate taxpayer, this reduces the effective cost of a £1 donation to 75p while for an additional rate taxpayer this reduces further to 62.5p. Furthermore, if an individual has income between £100,000 and £112,950 for the 2010/11 tax year (the level at which the personal allowance is withdrawn), the relief afforded to the taxpayer becomes even more valuable. It is therefore worth making sure that the spouse paying tax at the highest rate makes these donations where possible. A donor may also be able to elect for a donation to be treated as made in the previous tax year. The election must be made by the date of delivery of the self assessment return for the previous year but can be very useful, as it allows the taxpayer to first review his or her prospective tax liability before considering the most cost effective way of charitable giving.

Capital Gains Tax planning – Utilising the annual exemption – The CGT annual allowance also deserves some consideration. The allowance currently stands at £10,100 for the tax year 2010/11 and provides individuals with the opportunity to make small disposals free from CGT. There are a number of options we could discuss with you:

  • Fragmenting a gain so the impact is spread over two or more tax years.
  • Selling and immediately reacquiring shares is no longer allowed but similar benefits can be gained by a spouse or ISA reacquiring shares.

Inheritance tax – Utilising annual exemptions – As with the other annual exemptions considered here, the IHT annual exemptions available should also be used where possible. Although the annual exemption is only £3,000, where the exemption has not been fully utilised in the previous tax year, this can be brought forward one year, allowing a potential gift of up to £6,000 to be made.

There are many more ideas contained in our client’s Year End Tax Planning pack.

If you have any queries or would like some additional advice please contact me as soon as possible.

Sue Stephens

Tax Manager