Higher Rate Tax Dodges for Investors
In just two months time some of you will be facing income tax rates of up to 60%!!! Tax boffins have been inventing some pretty complex schemes to avoid these but are there some simple steps you could be taking now? In this artice Accountancy Services Direct takes you through some options.
Solution
To avoid being caught by the new higher rates of income tax for 2010/11 the solution is simple, reduce your income for that year.
But who would want to reduce their income???
Having it all
The idea of cutting income is rather drastic and only worthwhile if you can recoup it later on when, hopefully, the tax rates will drop again. But, that could leave you waiting a long time.
An alternative is to shift your income to either:
The current tax year where the top tax rate is 40% and not 50-60%; or
To someone whose top tax rate will be 40% (or less) even after the April 6 2010 increases.
Benefits
From 6 April 2010 those with taxable income of more than £150,000 are liable to pay tax at 50% on income above that level. While those with income of between £100,000 and £113,000 are worse off, they will pay up to 60%.
Shifting, say, £5,000 of income from 2010/11 to 2009/10 can save you up to £1,000 (£5,000 x (60% – 40%)). But how?
Keep it simple
As mentioned earlier there have been some complex schemes put forward, but why make things complicated if you don’t have to?
Closing a bank or other interest producing account before 5 April 2010 can shift interest that would have been paid in 2010/11 in to the current tax year. This works best with accounts which pay interest only once or twice a year, or ones with lots of money in them.
Example
On 1 May 2009 Dave invested £75,000 in a fixed 4.8% twelve month account. This is due to pay him out £3,600 on 30 April 2010, ie in the 2010/11 tax year. He closes the account on 31 March 2010 and the bank pays him interest of £3,300 on that date. By advancing himself the interest in to 20009/10 he has saved himself up to £660 of tax (£3,300 x (60%-40%)).
One downside to this could be if banks etc charge any penalties for early closures of these types of accounts. You would need to compare the costs against what you would save in tax.
Give it away?
For investment assets other than deposit accounts the way to simply dodge the new higher rates may be even more simple. The new higher rates have breathed new life in to the idea of asset shifting.
Example
Billy is a company director with earnings of £95,000 per year after personal tax allowance. HE also receives income from stocks and shares etc totalling £15,000. Ava, his wife, is also a director and has a total income of £50,000 per year. It has never been worth shifting income between them before as they both paid tax at the higher rate of 40%. But now, if Billy transfers sufficient investments to Ava, so that his taxable income falls below £100,000, then they will save £2,000 of tax per year (£10,000 x (60% – 40%)).
Note – the spouse making the gift is deemed to sell the asset to the other spouse at a value that does not produce a capital gain or loss, ie will not trigger any Capital Gains Tax.
So, to surmise, if your taxable income will be more than £100,000 for 2010/11 but your spouses will be below that then transferring income producing investments will cut your joint tax bill.
We at Accountancy Services Direct can analyse your income and investment portfolio and determine what your tax liability will be for 2009/10 and 2010/11 to see if there are any potential savings which can be made. Contact us for more details.
Nil penalty for late tax returns
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