Why Is This Area Important?
Many individuals are paying more tax than is necessary. With careful planning and advice, we can help ensure that your investments are arranged and managed to achieve maximum tax efficiency.
What Solutions Are There?
There are 3 main taxes applicable to an individual. Below you will find further information on these taxes. Please note that depending on your circumstances other taxes may be applicable to your situation. As such, the information contained below is not exhaustive, but merely a generic guide to the most common forms of taxation applicable.
Income Tax
Income tax is a tax on ‘income’ there is no single definition in tax law - but it is payable, at different rates, on ‘earnings’, including investment earnings, savings interest and pensions, above certain thresholds and with certain allowances and reliefs, which are generally set annually by the Government in the budget.
There is no minimum age at which a person becomes liable to pay income tax.
However not all types of income are taxable and there are investments and savings which are paid gross, such as offshore deposit accounts, or are non-taxable, such as some National Savings products. The proceeds received from ISAs are not subject to income tax.
It should be noted here that any pension contributions made, currently get tax relief at your highest marginal rate. Contributions are made net of basic rate tax. The pension provider then grosses up that contribution by rebating the basic rate of tax paid, currently 20%. For higher rate tax payers, this means that they are able to reclaim the difference between basic and higher rate tax by completing their annual self assessment tax return, subject to HM Revenue & Customs legislation.
It is important when allocating savings and investments to do so efficiently according to your personal situation and goals, and that is where we can help.
Capital Gains Tax (CGT)
As a rule, you have to pay CGT if you, outside of a business activity, dispose of something for more than you paid for it. But of course it is not that simple. Profits on the sale of a business, or shares in a company (quoted or unquoted), or investment gains generally, whether securities, land, buildings, antiques or jewellery, are taxable. The most common exceptions to this are private cars and your home, as long as this is your principal place of residence.
Other exceptions to the rule are any capital gains that are made from ISAs, pensions, Premium Bonds, betting, lotteries or personal injury compensation claims, which are all currently also exempt.
You also have an individual personal allowance set annually by the Chancellor Of the Exchequer: if your gains come to less than £10,600 in the tax year 2011/12 you do not have to pay any CGT. The government has altered the rules slightly in that any gain over and above the annual allowance is added to your taxable income for that tax year. If the total still falls below £35,000, then a flat rate of 18% on the taxable gain would apply, however if the gain, when added to your other taxable income takes you over £35,000, a rate of 28% would be applicable to the chargeable gain. There are exceptions to this rule.
Inheritance Tax
Inheritance Tax, (sometimes referred to colloquially as ‘death duty’) is a tax that is levied on your estate upon your death, currently at a rate of 40% on the value above £325,000 (for the tax year 2011/12).
There are various planning methods you can use to mitigate this liability, such as the use of trusts (see the trusts page for more information). In addition to this, the government will allow certain gifts to be made, which can also help to mitigate your liability to inheritance tax.
Again, it can all get very complex. However the estates of many individuals have paid heavy financial penalties for not confronting IHT planning and taking action to protect their beneficiary’s inheritance. We are able to advise you of the issues and if required, can direct you to appropriate specialists who can help you. We are also always happy to work with your existing professional advisers to achieve the optimal solution for your situation.
