UK: Personal Tax Checklist 2008/2009

Last Updated: 11 February 2009
Article by Richard Mannion

Sole-traders and partners

If the results for the accounting period ending in 2008/09 are down on the preceding year, consider:

  • claiming a reduction to the 2008/09 interim income tax payments, due on 31 January and 31 July 2009
  • making a loss relief claim outside of the tax return, if the accounting period has ended and the tax loss is quantifiable. (The Pre-Budget Report included an announcement to extend loss relief carryback, capped at £50,000.)

We have a briefing note which outlines the tax payment date rules for these and other individuals, and the options available for managing the cashflow impact of those payments.

Where small and medium-sized businesses are facing cashflow and credit constraints there has been a rebranding and revitalisation of the existing 'Time To Pay' facility, whereby businesses in difficulty may spread their tax payments over an affordable timetable through the Business Payment Support Service.

Where cashflow problems are envisaged, you should let your usual Smith & Williamson contact know as soon as possible.

Small businesses – a word of warning

HM Treasury and HM Revenue & Customs (HMRC) put forward draft legislation designed to prevent 'income shifting' from an individual, who can control the distribution of income via a company or a partnership, to another individual who pays less tax. The new rules, which were due to come into effect on 6 April 2008, have now been deferred until April 2010, but it may still be necessary to review structures and arrangements in place for partnerships and 'family' companies.

General CGT planning

  • Look at using the annual capital gains tax (CGT) exemption (£9,600 for 2008/09). It is not possible to 'bed and breakfast' investments unless the repurchase is over 30 days later. However, there are alternatives such as 'bed and spousing' and 'bed and ISAing'. (Please note that losses crystallised by such transactions, where the repurchase is within 30 days, will be restricted.)
  • If your spouse has unused capital losses or annual exemption, consider transferring (unconditionally) shares with in-built gains to him/her prior to a disposal.
  • Consider deferring disposals until after 5 April to defer tax payment by one year. But beware that the tax rate for the next tax year may be higher.
  • Review investments to see if any have become of negligible value. If appropriate, a capital loss can be claimed to reduce current year gains. Alternatively, consider disposals of assets standing at a loss to crystallise the loss, so that it can be used against current year gains.
  • Where subscribed shares in unquoted companies have become of negligible value, it may be possible to set the loss against income rather than gains.
  • For property purchases and share transfers (especially where the shares are in a property company), try to complete contracts before the Budget (usually March), in case stamp duty rates increase. The vendor will, of course, need to consider his/her CGT position.
  • With a CGT rate of 18%, compared to the top rate of income tax of 40%, consider investing in assets where the 'profit' would give rise to a CGT liability as opposed to income tax.
  • Offshore income gains are taxed at 40% (e.g. on offshore funds, hedge funds etc.), whereas capital gains are taxed at 18%. Consider the after-tax return on such funds.

(Please note that references to spouse apply equally to civil partners.)

Pension

Review your pension provisions and existing rights. In particular, consider the following.

  • Where do you stand compared to the lifetime allowance on the value of funds (£1.65m in 2008/09)?
  • If you have large existing pension funds, any of which are not yet in payment, you may need to consider registering them for protection with HMRC, before the deadline of 5 April 2009, to avoid tax at 55%. This is a complex area and we have a dedicated team at Smith & Williamson who can help identify whether this is an issue that could affect you.
  • What are your current funding and investment strategies, especially in light of current market conditions?
  • Make full use of the current year pension relief by 5 April 2009 (relief available for contributions of up to £3,600 or, if more, equal to 100% of earnings up to £235,000 in 2008/09). The £235,000 cap does not apply in the year the pension vests.
  • Consider the opportunity to double up maximum premiums in one tax year.
  • Use stakeholder payments for non-earning spouses and children.
  • Could a self-invested arrangement give increased flexibility, and access to funds for lending, to your business or investing in assets used in your business?

Investments/savings

  • Consider using tax-free investments through Individual Savings Accounts (ISAs), National Savings, etc.
  • Use the annual £7,200 maximum ISA subscription (for each spouse).
  • Consider funding a cash-only ISA (maximum £3,600 for 2008/09) for children/grandchildren aged 16 to 18.
  • Consider transferring income-producing investments to your spouse, or holding them jointly, to take advantage of both personal allowances or lower tax bands.

Tax shelters

Think about enterprise investment schemes (EISs) and venture capital trusts (VCTs) as they provide tax shelter/deferral benefits. Investments in them can enjoy income tax relief (VCT at 30% and EIS 20%) plus CGT deferral for EIS investments. Note that these are relatively risky, and specific investment advice should be taken.

IHT regime change

The introduction of new rules to allow the estate of a surviving spouse/civil partner to benefit from the proportion of the nil-rate band (NRB), currently £312,000, unused on the earlier death of a spouse, has shifted the emphasis of inheritance tax (IHT) planning away from maximising use of the NRB on the first death, which often involved the creation of a NRB trust.

Such arrangements may still be desired for non-tax reasons, but the 'transfer' of unused NRB allows for greater flexibility.

A Smith & Williamson tax factsheet is available which covers the points in more detail, suggesting the following action points.

  • Review wills and estate planning arrangements in light of the proposed changes.
  • Obtain and file the necessary paperwork from the earlier death(s) now to simplify the claim process in due course.

Wealth protection and general IHT planning

  • It may be possible to take advantage of current market conditions for reduced IHT and CGT liabilities by gifting assets at relatively low values.
  • Consider gifts to use the annual IHT exemption of £3,000, as well as regular gifts out of income, which are free of IHT, even if death occurs within seven years. If none of the £3,000 exemption was used in 2007/08, the IHT exemption available for 2008/09 is £6,000. The valuable relief for regular gifts made out of income, requires a regular pattern of gifts that leaves the donor with sufficient income to maintain his/her usual standard of living.
  • Separate gifts of up to £250 can be made to any number of individuals in a tax year.
  • Consider lifetime gifts, in addition to those mentioned above, to start the sevenyear clock running and mitigate IHT on death. This can be done by way of outright gifts or gifts into trust, but take advice on the CGT and IHT implications when doing so. Remember that business assets and agricultural property could enjoy up to 100% relief from IHT.
  • Consider life assurance written in trust to fund any exposure to IHT.
  • Ensure that existing life assurance policies are written in trust to mitigate IHT.
  • There are various schemes available which may reduce the potential IHT on your estate. These schemes are not suitable for everyone and specific advice should be sought.

Pre-owned assets

This income tax charge may affect people who give, or have given away, an interest in land, buildings or chattels from which they continue to benefit, or from an asset derived from a gift.

The rules target various methods of planning aimed at avoiding IHT gifts with reservation charges, but the new rules can also catch people who had no intention of avoiding IHT.

The pre-owned asset rules are complex and operate slightly differently, depending on the asset in question.

We have a tax factsheet setting out the basic details, but advice should be sought where appropriate.

Review family trusts

There have been various changes in recent years and it is worth reviewing whether the current trust structures are achieving what was intended. The following are examples of family trusts that may be worth reviewing.

  • The taxation of settlor-interested trusts has changed so that gains are now taxed on the trustees with an annual CGT exemption. However, settlor's personal losses cannot now be set against such gains, and CGT holdover relief is not available on transfers into these trusts.
  • CGT holdover relief now applies on transfers in and out of most other types of trust.

Residence and domicile

The Finance Act 2008 introduced a new regime whereby, from 6 April 2008, non-UK domiciliaries who elect to be taxed on the remittance basis will cease to be entitled to certain personal allowances. Furthermore, if they are UK resident for at least seven out of the preceding nine tax years, they will be subject to a £30,000 tax levy. (We have a number of briefing notes available for background information on the various related issues.)

The following points should be considered before April 2009.

  • Quantify the effects of the new rules and the interaction with double tax treaties.
  • Review existing offshore investment structures.
  • If both spouses/civil partners are affected, hold the sources of unremitted income in the hands of one, thus incurring only one levy.
  • Consider setting up separate offshore accounts for capital gains, capital losses and 'nominated' income. This is a complex area and advice should be sought.

The long-standing practice of ignoring days of arrival in and departure from the UK, when considering residence status, ceased from 6 April 2008, with days of arrival now counted in most cases. Where there are frequent short trips, advice should be sought as HMRC has recently won a number of cases relating to residence and domicile.

Charitable giving

  • Consider making Gift Aid payments to charities before 6 April 2009. (Also, payments made in the following tax year can possibly be related back.)
  • Make sure the charities you support are provided with Gift Aid declarations to ensure that ad hoc gifts get tax relief.
  • Consider giving quoted shares, quoted loan notes or units in authorised unit trusts to a charity rather than cash, as this may be more tax-efficient as income tax relief is based on the value donated and there is no CGT (such gifts can be made through the Charities Aid Foundation). An alternative option is to sell shares to the charity at less than market value.
  • Gifts of land, freehold and leasehold interests can also qualify for tax relief.

Child tax credit and working tax credit

  • New claims can only be backdated three months.
  • Make sure you notify HMRC if your circumstances change.
  • Claimants issued with a tax credits end-of year return need to file this by 31 August, so as not to affect the claim for the new tax year. If you are living with a civil partner, or with a same-sex partner as if in a civil partnership, you must make a joint claim as a couple.

Child trust fund

If you have received a voucher, make sure you use it before the deadline otherwise the funds will be managed by the Government.

Consider adding the full £1,200 that parents, family and friends can contribute to the child trust fund (CTF), bearing in mind that income within the CTF account will be taxexempt. Remember that, where gifts from parents generate more than £100 of income for the child, it is taxed on the parent, unless held within the CTF.

Funds in the CTF account go to the child when he/she reaches 18 or can be rolled into an ISA.

Another option is to set up a stakeholder pension for the child, with the advantages of contributions made net of basic rate tax relief, and wealth passing down and providing the start of a fund accumulating free of tax for his/her retirement.

Marriage and civil partnerships

Marrying or entering into a civil partnership has a number of tax and other financial consequences. Advisers should be informed of plans in either case, as planning can mitigate tax charges. The following points should be kept in mind.

  • Married couples and civil partners receive the same existing inter-spouse CGT and IHT exemptions.
  • Only one main residence CGT relief is available to the two individuals upon entering into a marriage or civil partnership.
  • Spouses and civil partners become connected persons/associates and so come within the scope of various anti-avoidance rules. This could affect the rate of tax being applied to their totally separate companies. It also has implications regarding settlements they have or create, and offshore transfers.
  • Wills are automatically revoked on marriage and on entering into a civil partnership.

Please note

Some of the above points require immediate action, but you should not act without specific guidance from your usual Smith & Williamson adviser, or one of the contacts listed below.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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