Where it is investment income that causes the individual’s adjusted net income to fall in the £100,000 to £114,950 band then, depending on the person’s circumstances, any of the following might be an appropriate strategy:
- Redistribution of investment capital to a spouse with a lower income so that the income generated is taxed on him / her instead
- Reinvestment in tax free investments, such as an ISA, so that taxable income is replaced with tax free income
- Reinvestment in tax-efficient investments that generate little or no income and so will not impact on the loss of the personal allowance. Such investments could include unit trusts / OEICs geared to producing capital growth and single premium investment bonds from which a 5 per cent tax deferred withdrawal may be taken each year, for 20 years, without affecting the personal allowance calculation
Transfers between married couples, where both spouses are UK domiciled, will not incur any inheritance tax nor will there be any capital gains tax (CGT) if they are living together. In order to benefit from the tax advantages, the transfer must be genuine with no agreement that they transferor will benefit in the future ie the transfer must be outright and unconditional.
Self-employed people and owners / managers of small companies may be able to manipulate income levels by adjusting salary / bonuses to reduce tax. For the owner of a small business this will be easier to achieve by adjusting salary / bonuses and dividend levels and retaining more profits within the business. For the self employed this will be more difficult and will involve consideration as to whether they can genuinely consider employing a spouse and so indirectly transfer income.
Planning with tax-efficient investments
With the rates of effectively having increased, it is most important that people invest in the most tax efficient way possible. All of these could be looked at – ISAs, growth-oriented unit trusts and OEICs where CGT allowances can be used, single premium investment bonds, maximum investment plans, enterprise investment schemes and venture capital trusts. In addition, pensions offer particular opportunities.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
The Financial Services Authority does not regulate taxation and trust advice.
The content of this blog is for information only and does not constitute advice. It is based on our opinion and understanding of legislative and regulatory aspects of the financial arena. We strongly recommend that you seek professional advice before embarking on any course of action.
- Those with income of more than £100,000 who lose all or part of their basic personal allowance and so suffer an effective tax rate of up to 60 per cent.
- Those with taxable income of more than £150,000 who now suffer 50 per cent income tax on the excess (42.5 per cent on dividend income)
- Those will be pay higher rate tax for the first time because of the changes to the personal allowance
- Those higher rate taxpayers who might be affected by proposals to amend Child Benefit entitlement from January 2013.
Fortunately, tax planning possibilities are available to most people regardless of their tax position and I will look at ways in which these people can improve their position.