It’s That Time Again
As usual it is sensible at this time to review your personal tax situation, particularly to ensure that full use has been made of the reliefs and allowances to which you are entitled.
Starting with income tax, it is sensible to discuss with your financial adviser as to whether you have taken full advantage of the tax free regime, including such tax free investments as certain National Savings products and ISAs. As with nearly all allowances I will be mentioning today, if they are not used by the 5 April then largely they will be lost.
With particular importance with income tax is pension planning. The tax rules on pension schemes changed from the 6 April 2006. The then funding rules were replaced with an Annual Allowance and Lifetime Allowance. The Annual Allowance for personal pensions for 2006/07 is £215,000 with the Lifetime Allowance for that year being £1.5 million.
The limits for Enterprise Investment Schemes for the year are £400,000 and for Venture Capital Trusts £200,000.
Moving onto capital gains tax, basic relief is the annual exemption which is available to each individual and for the year 2006/07 is £8,800. It is advisable where possible to utilise these exemptions. Readers will be aware that the old “bed and breakfast” method has been legislated out of existence.
Finally, inheritance tax. Firstly the nil rate band stands at £285,000. This will increase to £300,000 on 6 April. With the new tax regime taxing new trusts from the moment of creation, it is where affordable useful to limit a new trust to the nil rate band, survive for 7 years and then start again. The reliefs and allowances that we are more used to are the annual £3,000 allowance. In real terms the value of this allowance has fallen dramatically since it was introduced. Remember that if it is not used in one tax year, it may carried forward to the following tax year, but no further. Thus, if you have not used your annual allowance of £3,000 for the last tax year, then this year you may gift £6,000. If you do not make gifts at all for last year and this year, you cannot use £9,000 next year, you are limited to carrying forward one year only. In addition you may give small gifts of £250 to as many individuals as you choose. If there are likely to be wedding bells or a civil partnership, then a parent of a party to the marriage or civil partnership may give £5,000, grandparents £2,500 and others £1,000. Again rather mean, but we live in a time of a very mean spirited Government.
Perhaps the most misunderstood, or perhaps just mysterious relief available in the Inheritance Tax regime is the relief available in respect of normal expenditure out of income, granted by section 21 Inheritance Tax At 1984.
A gift out of income is an exempt transfer for Inheritance Tax purposes if, or to the extent that, it is shown; firstly that it was made as part of the normal expenditure of the transferor, and, that taking one year with another it was made out of his income; and after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.
There are various rules that surround such gifts, and it is important that they be followed. For tax purposes “normal” is not defined, each case being judged on its merits. However, the test of normality requires patterns of giving to be established. In other words there should be a regular pattern of gifts, and indeed it is better if there is a commitment to gift. On occasion relief has been obtained after one gift has been made, there being clear evidence that further gifts were intended. “Income” for the purposes of the exemption means net income after income tax determined in accordance with normal accountancy rules, rather than income tax rules. The tax office has made it known that a one off payment, even if it was out of income, will not be exempt.
Although there needs to be a regular pattern of giving for the exemption to apply, this does not mean that the amount of the gift each year needs to be fixed. Indeed, coming as it does out of surplus income it is likely to change year on year, but that said, there is not a problem if the amount each year is the same.
