2008/9 Year End Tax Planning - A window of opportunity
The 2008/9 tax year closes on 5th April 2009, and so now is the time to start thinking of 2008/9 year end tax planning opportunities that are available to you.
The following year end tax planning tips could help you save a considerable amount of money, so it could be worth taking the time to review your position.
Check whether it’s a good idea to raise a dividend before the end of the tax year so that you utilise the full amount of the lower tax threshold for all shareholders. Gross earnings above £40,835 will be taxed at the Higher Rate.
This may also apply to your spouse / partner if they are share holders of the company.
Income Shifting Legislation
This proposed legislation has for the moment been shelved by the government and so there are no changes to the existing legislation.
It is now the time to think about splitting Investment Income (included letting income) with your spouse/civil partner, to make the most use of both your 20% tax brackets.
If one spouse’s earned income is only up to £6,035, it may be worth having all investment income in their name to make use of the 10% tax bracket available only for savings income.
You may be able to reduce your payments on account in 2009 if you believe your Gross Income is going to be reduced in 2009-10 compared to 2008-09.
Directors Loan Accounts
Ensure that any Directors Loan Account balances over £5,000 are cleared by way of dividend, salary payments or expenses reimbursement by 31st March so that your accounts reflect a directors loan account balance of less than £5,000 at the 2008/9 year end which will remove any benefit in kind charge on an overdrawn loan account.
This will also avoid the section 419 tax which may be payable by the company and is only refunded once the loan account has been repaid.
Sole Traders or Partners in a Partnership or LLP
Due to the current economic downturn you may recently have experienced a drop in your profitability, indeed you may be trading at a loss.
If this is the case please read the check list that follows. We can only help you to achieve the very best tax result if we are made aware, in good time, of your financial situation. Read the check list and call for a pre year end review.
If you are trading at a loss you may be eligible to carry up to £50,000 of the loss back for an extended period under new rules applying to the current year only. To maximise the losses claimed it may be beneficial to change your accounting date to 31 March 2009, if it is not already this date.
Timing of capital purchases or disposals, either before or after the end of the tax year, can be organised to maximise claims under the new Annual Investment Allowance of £50,000.
If your profits have decreased this year, to 31 March 2009, compared to the previous year (31 March 2008), this may reduce the tax payments on account you offer in January and July 2009.
If you are forced to layoff staff and have some flexibility when you make redundancy payments, is this best charged in this current year, or the decision deferred to the next trading year?
What is your bad debt situation. Have you made adequate provision in your accounts. Has any VAT on bad debts over 6 months old been claimed back? Please note that if you use Cash Accounting for VAT you only pay VAT added to your invoices when you are paid - so you don’t need to worry about claiming for bad debts.
If you have made a loss in this current year does this affect the tax relief you may have received on pension contributions? Will the tax have to be repaid or contributions recovered?
Consider maximising contributions for the year. The amount that can be contributed to a pension scheme is based on the salary earnings in a fiscal tax year and once that year has ended any allowance that is not used is lost. If you wish to utilise the allowances for the 2008/09 fiscal year you should take action quickly.
Non-tax payers can also contribute up to £3,600 per annum with no earnings. It might
be worth considering contributing this amount into your child’s pension or grandchild’s pension scheme as well.
Consider whether you want to increase your personal pension contributions for the tax year 2009-10.
If you have Company Pension Contributions, these would save you 21% in Corporation Tax up to for the 2008/9 tax year, but will save you 22% in Corporation Tax for the 2009/10 tax year.
This means that £100 into a company pension would actually cost £79 in the 2008/9 tax year, and £78 in the 2009-10 tax year.
Maximising ISAs for younger savers: 16 and 17 year olds can invest up to £3,600 for the tax year 2008-09 in a cash deposit within an ISA.
Maximising ISAs for other savers: the maximum allowed for the tax year 2008-09 is £7,200.
These limits cannot be carried forward so it is important to use the full allowance before the end of the tax year.
Utilisation of Child Trust Funds: all UK residents born after 31st August 2002 are eligible for this fund and they (or their relatives) may contribute up to £1,200 per annum with the income and gains arising being tax free. The Treasury give you £250 when you open a trust fund and £250 when your child is seven years old.
Enterprise Investment Schemes
You may want to consider investing in companies that qualify under an EIS scheme, or a specialised EIS fund which invests in a portfolio of companies.
A minimum of £500 needs to be invested in any one company in any tax year, with a maximum of £500,000 available to be given relief at 20%. Therefore an investment of £100,000 can secure a tax relief claim of £20,000.
If you are making an investment before 6th October then half the investment up to a maximum of £50,000 can be carried back to a previous year. Invest before 5th April to get 20% tax relief on your investment this tax year.
Specialist advice should be taken before making an investment of this kind.
Venture Capital Trusts
You can invest up to £200,000 in a VCT which attracts tax relief at 30%. Dividends from a VCT are not subject to income tax.
Specialist advice should be taken before making an investment of this kind.
Capital Gains Tax
Each taxpayer has a tax free capital gains allowance of £9,600 for the 2008/9 tax year. This tax allowance cannot be carried forward so if you may want to consider the timing of the sale of assets in order to utilise this tax free allowance.
A self employed trading loss for the tax year 2008-09 can also be set against Capital Gains Tax on a capital gain realised in 2008-09.
If you have capital gains in a share portfolio you could consider arranging the sale of the shares and then the transfer of the proceeds into an ISA.
You will need to take specialist advice if you are considering selling or buying shares.
Now is the time to ensure that if IR35 applies to your Limited Company and the contract that you perform, you ensure that you have had your contracts reviewed and you have made a decision for each contract how the income should be accounted for. If any income from any contracts fall within IR35 you will need to prepare for the calculation of the Deemed Payment effective at the end of the fiscal year, and to plan your actions accordingly.
There are four ways of reducing your IR35 Deemed Payment:
- Ensure that you maximise the legitimate expenses you have claimed in the year against the contract.
- Ensure that you have claimed capital allowances on any equipment purchased to complete the contract.
- Consider making company pension contributions.
- Ensure that you have claimed all your professional subscriptions required to complete the contract.
A company has an Annual Investment Allowance of £50,000 on which capital allowances at 100% are allowed. If your company financial year end is March 2009 or before you need to consider whether to invest in assets in this tax year or next.
A programme of lifetime gifts is still an effective way of reducing your estates exposure to Inheritance Tax (IHT) . You may want to consider making lifetime gifts in the 2008-09 tax year.
You could consider investing in shares in companies listed on the Alternative Investment Market as many of these shares qualify as assets under Business Property Relief which means these assets will not suffer IHT. This is a very specialist area and advice from an Independent Financial Adviser should be taken.
Higher rate taxpayers get tax relief on donations to registered charities, for example £300 relief on £1,200 of donations may make quite a bit of difference to your generosity. The donations need to be made before 5th April 2009 to count in the 2008-09 tax year.
It is important to sign the gift aid form which the charity should provide you with. Please ask for it if they do not provide you with it.
A taxpayer has an annual gift exemption of £3,000 in total. This gift exemption can only be carried forward one tax year so it is best to use this gift exemption before 5th April 2009.
Parents can also gift £5,000 if a child is getting married.
A second property - a new business
If you own a second home you may consider letting it as a Furnished Holiday Let. FHLs qualify as a trade and so losses can be offset against your income, unlike Buy To Let where losses can only be put against other Buy To Let income.
Buy To Let - Energy Saving Allowance
Buy To Let investors can claim up to £1,500 against letting profits for loft insulation; cavity wall insulation; draught proofing; solid wall insulation and hot water insulation. Work needs to be completed before 5th April 2009 to qualify for this tax year.
You need to take action now to gain many of these benefits which all have a deadline of 5th April 2009.
This article and these ideas are for general information and you should always take professional advice before taking any action.
Phil Richards, Blevins Franks Ltd
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