Trevor Law: Cut your tax margins before April deadline

Mar 18 2010 By Trevor Law

The rising tax burden that we will all face from April 6 has focused many people’s attention on reorganising their finances to minimise both income tax and capital gains tax.

Some simple, legitimate reorganising of one’s affairs can make significant savings in tax and there are numerous obvious opportunities for couples to arrange their affairs efficiently.

It is worth remembering that the rate of income tax will rise to 50 per cent from April 6 for income in excess of £150,000, which will include earnings, pensions, interest, rental income, dividends, et cetera – all added together.

Further, once income exceeds £100,000, the tax-free personal allowance is withdrawn at a rate of £1 for every £2 income exceeds £100,000. Effectively as I have mentioned in a previous column, this equates to a tax rate of 60 per cent on the band of income between £100,000 and £112,950.

For couples who own assets which generate investment income, to avoid one partner paying high rates of tax it can make sense to redistribute assets between the couple to minimise tax.

Lawyers Wright Hassall of Leamington Spa have introduced a handy Asset Sharing Plan to assist couples with their tax planning.

John Rouse, partner at the law firm explains: “Many married couples and civil partners are unaware that they can alter the ratios in which they own joint assets to make maximum use of their personal allowances and basic rate tax bands.

“There is a tendency for couples who hold investment properties and assets in joint names to assume that the income from those assets has to be shared equally between them.

“Likewise, those with property and assets in their sole name assume that any income cannot be shared with their spouse or civil partner.

“But by using a Wright Hassall Asset Sharing Plan, the ratio of joint ownership can be altered to maximising income into the name of the spouse/partner with the lower income level. Even assets in a client’s sole name can be altered to share income between spouses or civil partners.

“For married couples looking at selling assets in their sole name which will produce a capital gain, the sharing plan can be used to utilise their spouse or partner’s annual capital gains tax allowance and make a saving of up to £1,818.

“If an asset, such as your property, is owned in your sole name, you can use the plan to give your spouse or civil partner a share in the property without a formal transfer of the asset or alteration of the deeds at the Land Registry.”

The plan works by altering the balance of ownership of equal shares (50:50) to a different ratio (e.g. 75:25, 99:1 or even 100:0).

Alternatively people can use the plan to change an asset in their sole name to joint ownership. The advantage of this is that you can alter the ratio of joint ownership in order to give your partner a share in an asset for income tax purposes or for capital gains tax planning.

Also looking ahead to the forthcoming tax changes, it may be necessary to restrict income to a maximum of £130,000 for those wishing to make significant contributions into pensions before the new rules restricting tax relief for higher rate taxpayers come into effect.

Another way for employees and business owners on PAYE income to avoid breaching any of the above thresholds is to sacrifice income and redirect it as an employer contribution into their pension scheme.

This is a very efficient way of avoiding the higher rates of tax and saving for the future.

Other last-minute tax planning to be considered may be to realise capital gains before April 5 as capital gains tax presently is only 18 per cent and may well rise to match income tax levels in the future.

The Chancellor Alistair Darling has announced that there will be a Budget on March 24. Bearing in mind there is an election due very soon, it is very unlikely that there will be any significant changes to tax rates announced on that date.

But readers may wish to do their planning before March 24 rather than risk being caught by a surprise change in tax rates.

-Trevor Law is a director with Montpelier Group (Europe), the privately-owned independent financial advisers located near Solihull. E-mail: tilaw@montpeliergroup.com