Top ten tax tips for owner-managers...
14th March 2008...in the run up to the tax year-end, 5 April 2008.
Owner-managers are uniquely placed to cut their tax bill. So as the tax year-end approaches, Smith & Williamson recommends that you review your finances to catch the best cash-saving opportunities.
1. Assess reward package
Aim for a tax efficient mix of salary, dividends and bonuses. Radical changes are in the pipeline which could affect the way many company directors and their families draw profits. New legislation had been expected to come in on 6 April 2008, but in his Budget, the Chancellor announced a delay of twelve months to allow more detailed consultation. It is expected that under the new regime, those who work in the business should be paid the rate for the job so it would be wise to start this process now to establish a precedent.
2. Maximise allowances on capital expenditure
If planning to buy new equipment, bear in mind that new rules come into effect on 1 April 2008 for companies and 6 April for sole traders and partnerships. The new Annual Investment Allowance will enable small and medium sized businesses to obtain 100 per cent relief on expenditure up to the £50,000 limit. The annual allowance will be linked to the accounting period, so that a business with a 30 June year end could claim 100% relief on expenditure totalling £12,500 between 1 (or 6) April and 30 June and further assets totalling £50,000 in the year commencing 1 July 2008. Where more significant expenditure is envisaged advice should be taken as it might be more beneficial to make the purchase under the current regime.
3. Consider further pension contributions
Pension schemes represent one of the few Government sponsored tax saving vehicles where significant tax relief is still available. Where the company makes a contribution on behalf of the employee or the individual makes a net payment to the pension provider it is now possible to receive tax relief on an amount equal to earnings (subject to a cap of £225,000 for 2007/08).
4. Consider the timing of the sale of assets subject to capital gains tax (CGT)
Previously the standard advice has been that it may be worth delaying the sale until after 5 April as this could put back payment of the CGT for a year. However, with the abolition of Indexation Allowance (relief for inflation on assets acquired before April 1998) and Taper Relief, the position needs to be carefully reviewed so as to consider the effective rates of tax under the current and proposed regimes. The exchange of contracts, not completion, generally counts as the sale date.
5. Banking indexation allowance opportunity for married couples and civil partners
Where a significant amount of indexation allowance is available on an asset which was owned prior to April 1998 it will be possible to ‘bank' the allowance by means of an inter-spouse transfer made before 6 April 2008.
6. Minimising the aggregate family tax bill
Where possible ensure that both spouses' CGT and income tax allowances and tax bands are utilised by taking steps to ensure capital appreciating assets are not just held by one spouse and transferring income producing assets (such as quoted shares or a buy-to-let property) to the lower earning spouse. Transfers must be absolute and going forward care needs to be taken when doing this with shares in the family company or partnership interests in light of the proposed ‘income shifting' rules.
7. Check that you are not caught by the IR35 provisions
IR35 applies where the services of an individual are supplied via an intermediary and if those services had been provided direct, the relationship would have been that of employer/employee. This is particularly relevant to those with just a few clients. If affected, consider drawing a bonus before 5 April.
8. Tax efficient borrowing
Interest on borrowing for business purposes will qualify for tax relief whereas there is no relief for interest on personal borrowings such as the mortgage on your family home. Borrow the working capital that your business needs and preserve your funds to finance personal expenditure.
9. Consider IHT-free gifts.
Each person can make gifts of £3,000 per tax year without giving rise to IHT even if you die within seven years. If you can afford it and have not made gifts in the past you can make use of the 2006/07 and 2007/08 allowances (ie £6,000) if you act before 6 April 2008. In addition there are specific exemptions for gifts in consideration of marriage and regular gifts out of surplus income are IHT exempt.
10. Gift qualifying assets rather than cash to charity to maximise tax relief.
Giving quoted shares, loan notes or units in authorised unit trusts, is generally more efficient than a cash gift as you will benefit from both CGT and income tax relief (this also applies to gifts of qualifying interests in land).
For further information:
Richard Mannion, national tax director
Tel: 020 7131 4252
Email: richard.mannion@smith.williamson.co.uk
PR enquiries
Kate Harrison - 020 7131 4228
Sarah Miller - 020 7131 4264
Disclaimer
This is not an exhaustive list of potential tax planning opportunities. Always take professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editor
Smith & Williamson is an independent professional and financial services group employing over 1,400 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-size corporates. It operates from offices in London, Belfast, Bristol, Guildford, Maidstone, Salisbury, Southampton, Tunbridge Wells and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms.
