MANAGE

INCOME TAX & CGT PLANNING SERVICE

Helping to you to control how much tax you pay, by deferring liabilities and generating tax relief.

Income Tax Planning

The amount of income tax you pay can be controlled and reduced using every day financial planning techniques.

The most common method is to invest in pensions.  All pension contributions are made gross before the deduction of income tax, and you can now also control how much income you withdraw from a pension when you retire.

It is also possible to invest in tax-free or non-income producing investments, such as ISAs and Investment Bonds. However, with these investments there is no initial up front tax-relief, unlike pension contributions.

A portfolio of non-income producing investments can also be constructed and tailored around your personal circumstances, controlling how much taxable income you receive.

Investing in Venture Capital Trusts (VCTs) creates a 30% income tax credit to reduce your overall tax bill, providing an actual reduction in your annual income tax liability.  Dividends are also paid tax-free and there is no capital gains tax on disposal.

Capital Gains Tax Planning

Capital Gains Tax (CGT) is paid on disposal of certain investments.  CGT can also be controlled and even reduced by effective tax planning.

Everyone has an annual CGT allowance of £11,300 and there is no CGT on transfer of assets between married couples or civil partners.  Therefore, it can make sense to distribute assets evenly to utilise both CGT allowances.

It can also make sense to crystallise a loss on an investment, as losses can be used to reduce gains elsewhere. Losses can also be carried forward indefinitely to reduce or offset future investment gains.

Certain investments also allow you to be able to claim Holdover Relief, this is where the taxation of any investment gain is deferred. This can occur where assets are gifted into a Discretionary Trust or where the investment gain is re-invested in an Enterprise Investment Scheme (EIS).

Finally, there is no CGT liability on death, instead your estate maybe subject to inheritance tax.  Therefore, not selling an investment and holding it until death would eradicate any potential CGT on disposal, and if your estate is within the inheritance tax nil rate band, your estate would not pay inheritance tax either.

Case Study – Meet Tony, a director of a design company

Tony earns a large salary and good annual bonuses. He has accumulated significant savings in ISAs and contributes large amounts into his pension each year.  Tony has a large annual tax bill and is interested in other government endorsed ways to reduce the amount of income tax he pays.

Following discussions, a recommendation is made suggesting Tony invests £50,000 into VCTs.  In year 1, Tony can claim £15,000 income tax relief.  If Tony invests a further £50,000 in year 2, Tony can claim a further £15,000 income tax relief.

A VCT must be retained for 5 years, otherwise Tony will lose the income tax relief he has received. 

Whilst invested in VCTs, Tony will also benefit from tax-free dividends, and there is no capital gains tax to pay when Tony ultimately sells his shares.

In year 6, after Tony has held his first VCT investment for 5 years, he can choose to sell his shares without forfeiting the income tax benefits he has received.  The proceeds of sale could then be used to invest into another VCT, attracting more income tax relief.  

If Tony made a series of investments over each of the first 5 years, in year 7 Tony could also sell and reinvest his year 2 investment and again claim further income tax relief. The same would apply in future years.

VCTs are classified as high risk investments typically investing in unquoted shares which may make them difficult to dispose of.  The availability of various tax reliefs should not cause you to overlook the risks inherent in such structures and you may not recieve back all the capital you invest.