As this is the last edition of the Tax Insider before the 2006/07 tax year ends on 5 April 2007, there follows a summary of some tax planning points to consider before that date.
Property Rental Businesses
If you are a landlord your taxable profit is calculated on the basis of the income and expenses for the year ending on 5 April.
If you are expecting to spend significant amounts of money on repairs in the near future, consider making sure you “incur” those expenses before 5 April 2007. This will mean you get tax relief for the costs for 2006/07 rather than waiting another year until 2007/08.
Remember that expenses are “incurred” when you become obliged to pay them – not when you actually write the cheque.
If you have fewer than 50 employees remember that if you file the PAYE end of year returns using HMRC’s online system, you will be eligible for a (tax free!) payment from HMRC of £150.
Have you checked your PAYE Notice of Coding? Many of these notices are incorrect, leading to overpayments of tax so don’t just assume that HMRC will have got it right – read the notes that come with it and make sure it is correct.
If you have more than one job or if you are also self-employed, make sure you are not paying too much NIC. If you are, you can apply (before the start of the tax year) to “defer” payment of some of your contributions for next year.
If you run your business through a company consider how and when you want to extract cash from the company. Remember that if you pay yourself a dividend before 5 April this will be taxed on you for 2006/07, whereas if you pay it after 5 April the income tax liability will be for 2007/08, payable a year later.
This is also the time to do some housekeeping – does the company have a “dispensation” so that it does not need to report the details of all business expenses reimbursed to employees?
Do you really need that company car? In most cases you will be better off owning it yourself and charging the company for your business mileage. Look at the calculation of your car benefit for 2007/08 and decide.
Remember the £150 reward to smaller employers for filing their PAYE year end returns online (see above) applies to companies as well.
Talk to your pensions adviser to make sure you are getting the maximum benefit from making the appropriate pension contributions to your pension scheme for the tax year.
Also ask him about pensions for the family – even if a person has no earnings for the tax year, if they pay a contribution of up to £2,808 per tax year into their pension scheme the Treasury will contribute a further £792, bringing the total value of the contribution to £3,600.
Remember the annual maximum for payments into an Individual Savings Account (“ISA”) is £7,000 per tax year. If you have not yet paid in this much consider if you can afford to do so before 5 April – use it or lose it!
The CGT on a gain you make before 5 April 2007 will be payable on 31 January 2008. If you make a gain after this 5 April the CGT will not be payable for another year, on 31 January 2009. It generally makes sense to defer making the gain where possible but remember that a “disposal” for CGT takes place when the contract for the sale is agreed, not when it actually takes place – in the case of a house, for example, it is exchange of contracts, not completion, that triggers the capital gain.
If you have already made capital gains in the year consider disposing of other assets (shares, perhaps), which will realise a loss – only losses in the same or an earlier tax year can be set against gains for that year, so a loss on 6 April 2007 cannot be set against a gain made before that date. This strategy is not always the best – for example, do not waste a loss by realising it this tax year if your gains would be covered anyway by the annual exempt amount – see below.
You may not have to dispose of the asset concerned if it has become of “negligible value”. In such a case you can make a claim for a deemed loss on the asset – take advice if you think this applies to you as it can be complex.
Don’t forget your annual exempt amount for CGT – for 2006/07 it is £8,800. It used to be standard tax planning advice to “bed and breakfast” some assets – typically shares traded on the Stock Market- in order to realise a gain of exactly the annual exempt amount. For example, if you owned shares you had bought for £50 each and they were now worth £100 each, you could sell 170 of them for £17,000 making a gain of £8,500 (covered by the £8,800 annual exemption, so no CGT to pay), and buy them back the next day for the same £17,000. For those 170 shares, you now had a base cost of £100 each instead of the £50 you originally bought them for, so when you eventually came to sell them for real you would pay less CGT.
Some time ago, a new rule was introduced to discourage bed and breakfasting of shares – broadly, it says that if you buy the same shares back within 30 days of the sale, the transaction is ignored for CGT purposes.
You can still bed and breakfast your shares, therefore, but you will have to wait 30 days and so you will be exposed to the risk of price fluctuations during that time (with one exception – see below).
Married Couples and Civil Partners
Is one of you a higher rate taxpayer and the other not? Consider shifting your income-producing assets around to equalise your incomes for the next tax year – see the December 2005 issue of Tax Insider for more details.
When disposing of an asset owned by only one of you, remember that a gift to your spouse before the sale of a share in that asset will mean his/her annual exempt amount can also be used against the gain on the sale – but be careful with this planning as there are several pitfalls and you must take professional advice before you do it.
“Bed and Breakfasting” still works well for a married couple. If Mr A owns some shares in ABC plc and he wants to “bed and breakfast” as described above to use his annual exemption, instead of waiting the 30 days Mrs A can buy the same number of shares in ABC plc on the same day that Mr A sells his. It goes further – if Mrs A has shares in DEF plc, they can do this in reverse with Mrs A selling and Mr A buying. At the end of the day, the couple between them own the same number of shares in ABC plc and in DEF plc but they have enhanced the base cost of those shares in the good old fashioned way.
If you make an outright gift to an individual and then die within seven years, the inheritance tax on your death will be calculated to include the gift. Once you have survived the seven years, it will be ignored.
There is however an annual exemption for gifts up to a total of £3,000 made by an individual in any tax year. Even if you fail to survive the seven years, the £3,000 exemption per year is available – and if you do not use all the £3,000 in a tax year it can be carried forward to the next tax year but no further. In other words, if you made no gifts in 2005/06 and gifts of £3,000 so far in the current tax year, you have until 5 April 2007 to make a further gift of up to £3,000 which could never be charged to IHT even if you died within the seven years.
You can also make any number of gifts of up to £250 to any number of different individuals in the tax year and these too will be ignored for IHT.
Remember also that if your child has a Child Trust Fund, a total of up to £1,200 per tax year can be put into the fund (by you or by anyone else such as doting grandparents) without prejudicing the Trust Fund’s tax free status.
Finally, remember Gift Aid – if you make donations to charity and you pay tax at the 40% rate, you are entitled to tax relief on the donation you have made. In this case, it is not necessary to make the donation before 5 April 2007 to get the tax relief in 2006/07 – provided you make the donation before your tax return for 2006/07 is filed (the filing date is 31 January 2008 at the latest) you can elect to have the tax relief for 2006/07, even if the donation was made after 5 April 2007.
A very happy New Tax Year to you all!
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