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New Year Tax Planning T
he new tax year starts on 6 April, so what options might there be to reduce your tax liabilities?
Well the first comes via a new tax rate: the current 50% top rate of income tax, on taxable income exceeding £150,000, falls to 45% from 6 April 2013. So income of £100,000 received on 6 April rather than on 5 April could potentially reduce tax liabilities by £5,000 at a stroke. The high Income Child Benefit Charge (hICBC) came into effect on 7 January 2013. Now all households receiving child benefits where at least one of the parents has an annual taxable income above £50,000 will be subject to this charge. In such circumstances, a pension contribution made before 6 April 2013 may enable the claw back of child benefit under the new hICBC rules to be avoided.
Income splitting also provides an opportunity to save tax, particularly for owners of family companies. HMRC attempted to outlaw the practice whereby one spouse effectively transfers dividend entitlement to the other spouse, in order to utilise his or her basic rate band. However, the courts did not agree that this should be caught under the settlements legislation: so, where shares are gifted to enable dividends to be paid to the lower income spouse, an overall tax saving of £10,000 can often be achievable. They must be ‘plain vanilla’ shares – in other words simple with no additional features - but the number of shares gifted can be relatively small by comparison with the retained shareholding. It’s quite difficult for parents to provide income to
children to use their basic rate income tax band, as the settlement rules will be used by HMRC to tax such income on the parents. However, tax effective asset transfers may be possible from other family members, provided HMRC can’t argue that the parents are the “real” donors. Once children are over 18, income received by them will normally be taxed, even where income producing assets have originated from their parents. Capital Gains Tax
(CGT) and Inheritance Tax (IhT) issues may require consideration in relation to gifted assets. Many small trading businesses require a tax efficient strategy to sell the business or to pass it to the next generation. If the business is run within a company, it is vital to ensure a disposal of shares can be made - either without any CGT cost, possibly by gift subject to a holdover election, or at the reduced 10% CGT rate under the Entrepreneur’s Relief (ER) rules. Gains of up to £10m per individual may be covered by ER, but if it’s not available, the full CGT rate of 28% will usually be payable on the disposal value of the shares, less the amount originally paid. The ER rules are complex and tax planning needs to be put in place at least 12 months before a disposal. On the sale of a larger business, the potential tax saving for a couple could be up to £3.6m if you get it right. The structure of a business can often affect tax liabilities materially. Just because you have always traded as a partnership or company doesn’t mean changes cannot be made and with that, tax saved. It’s not too late to reduce your tax liabilities, but time is beginning to run out with 5 April looming! If you have any tax related concerns, Darnells offers a free, no obligation initial consultation. Stewart Rae, our tax specialist can be contacted on 01626 358500 or via email
info@darnells.co.uk. A range of factsheets and news updates can be found on Darnells’ website at
www.darnells.co.uk
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