Individuals and trustees may wish to consider by 5 April 2012 the issues below to save or delay tax liabilities.

Timing of income and tax rates

The personal allowance is reduced by £1 for every £2 over £100,000, so that, for 2011/12 it is lost if income exceeds £114,950. For 2012/13 the threshold will be £116,210. The effect is a 60% income tax rate on income in the band between £100,000 and that threshold. Those not domiciled or not ordinarily resident in the UK who are taxed only on remittances of overseas income and gains do not get the personal allowance, unless their unremitted overseas income and gains total less than £2,000.

The level at which 40% tax is charged comes down to chargeable income of £34,370 for 2012/13 which offsets the modest increase in the personal allowance. The 50% rate for individuals (42.5% on dividends) still applies from £150,000. There is little point in individuals bringing forward or deferring income, unless it is close to a threshold, but deferral does delay the tax liability. Trustees of discretionary trusts also have their tax rates unchanged. Deferral of income either for the trust or the beneficiaries (by delaying distributions) could be beneficial in some cases. If trustees are contemplating appointing an interest in possession there is merit in doing so before 6 April 2012.

Where possible, married couples and civil partners should ensure that both make use of their personal allowance and basic rate tax band.

Pension inputs

Pension inputs are contributions by you and your employer to your ‘pension arrangements’, including accrual of benefits in defined benefit (‘final salary’) schemes. The radical changes in the tax relief system for pension inputs make a review desirable, especially for those still in a defined benefit scheme. Tax relief for pension inputs for ‘pension input periods’ ending after 5 April 2011 is limited to £50,000, increased by any amounts by which pension inputs in the previous three years fall short of £50,000 a year. More details on this can be found here. Some commentators have speculated that higher rate relief on pension contributions will be abolished, so it might be worth considering making these before the Budget on 21 March. Tax-efficient investments Individuals should consider tax-aided investment opportunities: ISAs. No tax is payable on income and gains on investments within an ISA. You can invest up to £10,680 in total in 2011/12 of which up to £5,340 may be invested in a cash ISA. You may only contribute to one cash ISA and one stocks & shares ISA in any tax year.

Venture Capital Trusts (VCTs).

Income tax relief at 30% (or, if less, the amount of your income tax liability) is available on up to £200,000 subscribed for shares in VCTs if the shares are held for at least 5 years. Subject to limits on the size of holdings, dividends and gains relating to VCTs are exempt.

Enterprise Investment Scheme (EIS)

investments. Income tax relief at 30% (or, if less, the amount of your income tax liability) is available on up to £500,000 in 2011/12 ( £1 million in 2012/13) subscribed for shares in qualifying companies, provided the investor is not ‘connected’ with the company. Any gain on their sale is exempt from capital gains tax (CGT), if the shares are held for at least three years. Up to a further £500,000 may be subscribed in 2011/12 and claimed in 2010/11 (but then attracting income tax relief at 20%), if EIS relief was not fully used in that year. Furthermore, CGT on a gain realised up to three years earlier may be deferred by a subscription for shares in qualifying companies, even if the investor is ‘connected’ with the company.

Scheme (SEIS). This is a new scheme available for shares issued from 6 April 2012. On the basis of draft Finance Bill clauses a maximum of £100,000 can attract 50% income tax relief (or, if less, the amount of your income tax liability), which is withdrawn if the shares are realised
within three years. Any gain on their sale after three years is to be exempt from CGT. Furthermore, gains arising in 2012/13 on disposal of other assets that are re-invested in that year in SEIS qualifying shares are to be exempt.

Non-domiciled individuals adopting the remittance basis On the basis of draft clauses, after 5 April 2012 these individuals will be able to invest previously unremitted overseas income or gains in the UK in qualifying investments without a tax liability on the remittance. More detail is needed; but this should be borne in mind if any investment in the UK might otherwise be made before 6 April 2012.

Charitable giving

Unless your marginal rate will be higher for 2012/13, it is better to give by 5 April 2012 rather than later. This applies not only to gift aid donations but also to gifts of listed securities and land, where these qualify for income tax relief. Note that you may elect to treat gift aid donations made between 5 April 2012 and the date you file your tax return (but not later than 31 January 2013), as though they were made in 2011/12 for income tax purposes.

Pre-owned assets

Action by 5 April 2012 could avoid or reduce the income tax liability on the perceived benefit from ‘pre-owned assets’. This liability may apply if you continue to use an asset which you have previously owned but have transferred to another person, or if you have contributed to the purchase of an asset you use but do not own (such as a holiday home owned by your children but which you sometimes use). It may also apply if intangible assets are held by a trust you established from which you may benefit. More details on this very complex legislation can be found here.

Capital gains

Realising sufficient capital gains to utilise the annual exemption (£10,600 for 2011/12) remains worth considering. Those not domiciled or not ordinarily resident in the UK who are taxed only on remittances of overseas income and gains do not get the annual exemption unless their unremitted overseas income and gains total less than £2,000. Deferral of a disposal which gives rise to a capital gain (and which taken together with other gains and losses in the year would exceed the annual exemption) until after 5 April may be worth considering, as the capital gains tax (CGT) is then payable a year later, on 31 January 2014 rather than 31 January 2013. Deferral may also mean that certain disposals become eligible for entrepreneurs’ relief, under which gains are taxed at 10% rather than 28%. If any assets have become of negligible value, a loss claim should be considered for CGT purposes. In some circumstances income tax relief may be available instead.

Selling shares or securities to realise a gain covered by losses or the annual exemption and then buying the same shareholding within the next 30 days is caught by the anti-avoidance rules designed to prevent this ‘bed and breakfasting’. However, these rules do not apply to shares ‘re-acquired’ by the seller’s spouse or ISA. As mentioned elsewhere, Enterprise Investment Scheme (EIS) deferral relief may enable tax on a gain which has already been made to be postponed until disposal of the EIS shares. Relief is given for share subscriptions in EIS-qualifying companies
up to three years after the earlier disposal.

From 6 April 2012 gains realised on deposits in foreign currency accounts by individuals and trustees will no longer be subject to CGT, nor will there be relief for losses. Consequently, disposals (represented by withdrawals or payments in the currency) should be deferred until after 5 April 2012 if a gain would arise.

Inheritance tax

There are a number of exemptions for lifetime gifts which do not depend on surviving at least seven years, which is normally the case with inheritance tax (IHT). An individual may give up to £3,000 each year ending 5 April, together with any part of that ‘allowance’ not used in the preceding year. In addition, up to £250 each may be given outright to any number of recipients each year. There are special exemptions for gifts made in consideration of marriage or civil partnership; £5,000 for each of the parents of the couple, £2,500 for each grandparent and remoter ancestor, and £1,000 in other cases.

One important exemption that should not be overlooked is that for regular gifts out of income. Such gifts are exempt without upper limit provided the donor’s remaining after tax income is sufficient to maintain their usual standard of living. Despite the change in the IHT treatment of gifts into trust, a trust may be a suitable vehicle to receive such gifts.

Lifetime gifts of assets likely to increase in value are also worth considering, as any further growth in value during the donor’s lifetime is outside the donor’s estate, even if he or she does not survive seven years. Bequests to charity on death are already wholly exempt. On the basis of draft legislation published in December 2011, if bequests to charity on a death after 5 April 2012 are at least 10% of the amount otherwise chargeable at 40%, the tax rate on the balance will be reduced to 36%.

Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above.  If you would like advice or further information, please speak to your usual Shipleys contact.