1. Avoid tax on profits
You must pay capital-gains tax (CGT) on any profits when you sell shares or
other assets, although the first £8,800 (2006-07) is exempt.
The longer you hold an asset, the less CGT you have to pay. Most assets
qualify for non- business-asset taper relief. After three years you pay CGT
on 95 per cent of the gain; after a decade you pay tax on 60 per cent. For
example, a higher-rate taxpayer who sold a basket of shares after less than
three years would pay £4,000 on a chargeable gain of £10,000. After three
years, the bill would be cut to £3,800 and after 10 years to £2,400.
It may be worth waiting to sell because you may then collect an extra year of
taper relief. For example, if you bought shares five years ago and sold them
a day before the fifth anniversary, you would pay tax on 90 per cent of the
gain. If you waited another day, you would pay tax on 85 per cent. Taper
relief applies to all gains made after April 6, 1998. If you owned the asset
before this date, you apply the indexation allowance to the pre-April 1998
portion of the gain.
2. Transfer assets to your spouse
If you have already used up your own CGT allowance, you can transfer
investments to your husband or wife. You could also transfer assets to your
spouse to cut your income-tax bill next year.
Everyone can earn £5,035 this year (2006-07) before paying income tax. If you
are a higher-rate payer but your spouse is on the basic rate, you can switch
assets into his or her name and any income will be taxed at the lower level.
3. Offset losses
If you had gains of £10,000 but also suffered losses of £2,000, you would have
a gain for tax purposes of only £8,000.
You could then deduct your allowance of £8,800, leaving you with only £100
liable for CGT. If you are a higher-rate taxpayer, you would owe only £40,
assuming the gain isn’t reduced further by taper relief. Unused losses in
one tax year can be carried forward to offset gains in future years.
4. Sell assets and buy them back
There are ways to create a loss while in effect holding on to investments you
hope will bounce back. The tactic is known as “bed and spouse”.
You sell loss-making shares. At the same time, your spouse buys an equal
number of the same stock at the same price. You set the loss against gains
made on other assets. As a result, your CGT bill can be cut or eliminated.
Alternatively, you can sell loss-making shares and then buy them back
immediately within an Isa. However, you cannot exceed the annual Isa
allowance of £7,000.
Both tactics also work with unit trusts, but you need to be wary of the
bid-offer spread — the difference between the price of buying and selling
units.
5. Use your Isa allowance
Isas are exempt from CGT. If you sell investments outside an Isa you must pay
CGT on profits above the annual allowance of £8,800 (2006-07)
You can invest up to £7,000 in an equity Isa every year. Investments in cash
Isas are limited to £3,000.
Investors with maturing Tessas should also roll over their capital into a
Tessa-only Isa (Toisa). The transfer must be made within six months of the
Tessa’s end date. Money invested in a Toisa does not count towards your
annual Isa allowance.
7. Give to charity
Higher-rate taxpayers giving to charity under the Gift Aid scheme before April
5 can claim top-rate relief against their final bill for the tax year. If
you want to give £100, you donate £78, the charity claims £22, and you claim
back a further £18 on your tax return. You can give an unlimited amount of
money to charity under the scheme.
8. Make gifts
Your heirs must pay inheritance tax (IHT) at 40 per cent on the value of your
estate above the IHT threshold, which is £285,000 this tax year. If you
think your assets — including your house — will exceed the annual limit,
take action now.
Every tax year you can give away £3,000 of assets and they will not count
towards your estate for IHT purposes. If you do not use up the full
exemption in one year you can carry it forward, but for one year only.
Gifts of up to £250 a person are also tax-exempt. But you cannot combine the
two exemptions. You can also give £5,000 to your children as a wedding gift.
Grandparents can give £2,500 and anyone else £1,000.
Gifts between husbands and wives are always free of IHT, as are donations to
charities and political parties.
If a gift is regular, comes out of your income and does not affect your
standard of living, any amount of money can be given away and ignored for
IHT. You can make further tax-free gifts — potentially exempt transfers — as
long as you survive another seven years.
9. Boost your pension contributions
You get tax relief at your highest rate on pension contributions. When a
basic-rate taxpayer contributes 78p out of his or her taxed income, the
government tops this up to £1.
Higher-rate taxpayers will get a further 18p, usually by claiming it through
their tax return.
You can invest a maximum of between 17.5 per cent and 40 per cent of your
annual earnings in a personal pension, depending on your age. Members of
company pensions can contribute up to 15 per cent of their earnings.
10. Claim tax credits
The child tax credit goes to all families who have an income of up to £66,000.
To check if you are entitled to tax credits, or any other benefits, visit
www.entitledto.co.uk
