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Financial Planning Tips
Although the dust is still settling on the recent Budget announcements and we await the supporting legislation, we’ve come up with some planning ideas that have been inspired by the Budget as well as a reminder of a couple of established but less-well-known ideas.
Use capital losses and the annual exemption wisely
The Budget announced a rise in the capital gains tax (CGT) rate from 18% to 28% from 23rd June for most trusts and those individuals whose income and net gains (i.e. after current year losses) exceed the threshold at which higher-rate income tax is charged (£37,400 for 2010/11) after deducting the annual CGT exemption (£10,100 for 2010/11). As a consequence, for the 2010/11 tax year only, taxpayers will be able to deduct losses and the annual exemption in a way which minimises the tax due.
For example, consider Shirley, who has a taxable income of £27,400 in 2010/11 after all allowable deductions and her personal allowance. Shirley sold a non-business asset in May 2010 and as a result realised a chargeable gain of £20,000. In August 2010, Shirley sells another non-business asset, realising a chargeable gain of £25,100. Shirley has no losses to set against these gains.
What Shirley should do is to set her annual exemption of £10,100 against the gain arising in August, because that part of the gain is liable to tax at the higher CGT rate, leaving her with £15,000 of that gain taxable. The first £10,000 of that remaining £15,000 August gain is taxed at 18% because it falls within Shirley’s remaining unused basic-rate income tax band. The remaining £5,000 is taxed at 28%. The £20,000 chargeable gain realised in May, before the change in the CGT rate, will be taxed at the old 18% rate and has no impact on the post-22nd June gains computation.
If you realise a loss in the same tax year as a gain, the loss will be offset against the gain, even if the gain is within your annual exemption. As a result, you could end up wasting the loss, which is now more valuable as a result of the increase in the rate of CGT. However, any carried-forward capital losses from earlier tax years may be allocated against post-22nd June 2010 gains which are subject to 28% tax, rather than gains arising between 6th April and 22nd June 2010, which are subject to the old 18% rate. Some investors may prefer to pay 28% tax and preserve carried-forward losses if they anticipate CGT rising further in future years.
Use pension contributions to minimise other taxes
The Budget confirmed that the current anti-forestalling rules would remain. These restrict higher-rate tax relief on pension contributions of between £20,000 and £30,000 for those earning more than £130,000 relevant earnings in 2010/11 (or in either of the two previous tax years). However, the Budget also confirmed that the government will abolish the (complex) legislation that was to...read the rest of this article by signing-up for a free trial issue of The Schmidt - Save £99 by ordering now!Save £99 first year. Print, complete and post the trial standing order offer application.
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