Guest Blog: Taxes and how to avoid them
21-10-2015
We are delighted to share a guest blog post from Chris Davies from Ross Brooke Accountants on Taxes and how to avoid them.
There are many opportunities to save tax and there is nothing illegal or immoral ensuring that you pay as little tax as possible within the spirit of the law. I see many occasions when too much tax is paid unnecessarily and here are a few tips for minimising your own tax position:
Income Tax
This is the tax that you pay on your salary, profits and investment income. At rates up to 45% tax planning can be very worthwhile.
- If you are in business, consider employing your spouse of children for the work that they legitimately do for you;
- Make sure that you extract money from your business in the most tax efficient manner. Often dividends or rent can be more tax efficient than taking a salary;
- Ask your employer about a salary sacrifice arrangement for a non-cash benefit;
- Reorganise income bearing assets with your spouse so that you maximise your respective rates and allowances;
- Paying into a pension can not only provide for your retirement but also shelter some of your income from your marginal rates of tax;
- Similarly Gift Aiding donations to charity not only benefit the charity but could save you significant amounts of tax;
- Use up your annual ISA allowance;
- Investments in Venture Capital Trusts and Enterprise Investments Schemes can save up to 30% income tax on the initial investment as well as defer any capital gain held-over. Better still Seed Enterprise Investment Schemes can save up to 50% income tax.
Capital gains tax
This is generally payable on the profit you make on the disposal of your assets eg shares and properties. At rates up to 28% it’s important to get things right.
- Use up your annual exempt allowance as it cannot be carried forward to another year;
- Consider transferring assets to your spouse prior to disposal to use up their annual allowance;
- Ensure that your affairs are structured efficiently so that all available reliefs eg Entrepreneurs’ Relief, Principal Private Residence relief are maximised.
Inheritance tax
If the value of an individual’s chargeable estate on death, together with the value of chargeable transfers in the previous 7 years exceeds £325,000, then the excess will be charged to IHT at 40%. However, with careful planning between client, solicitor and accountant the ultimate inheritance tax liability on an individual’s estate can be substantially diminished if not entirely eliminated:
- Make gifts of assets more than 7 years before death as these will escape IHT entirely;
- Make gifts to your spouse in life or on death as these will pass tax free;
- Make regular gifts out of surplus income during your lifetime as these will not be included in the value of your estate;
- Use your annual gifts exemption (currently £3,000 per year);
- Invest in a qualifying trading business of farming businesses to shelter up to 100% of the value of assets on death;
- Arrange your borrowings in a tax efficient manner;
There are many steps that can be taken in order to achieve legitimate tax savings. More often than not your accountant and/or solicitor will be uniquely placed to advise you not only on the proposed transaction, but also the knock on effect that it may have, which is why you should always take proper professional advice.
Follow Chris on Twitter @ChrisDavies_RB
