Tax Planning – What is Tax Planning?

What is Tax Planning?

Tax planning is a systematic evaluation of finances and investments, to reduce the tax burden in a legitimate way. It involves understanding the tax implications of various cash inflows and outflows such as salary composition, property income, home loan, investments, sale or purchase of assets, gifts and interest-bearing deposits, to draw up an appropriate investment strategy that allows realisation of financial goals while at the same time reducing tax liability to minimum.

Approaches

The two basic approaches of tax planning are

1. Reducing taxable income

2. Deferring payment of taxes to the extent possible

As a rule, higher the income or profit, higher the tax liability on such income or profit. Gross income is total profits or income from all sources, and taxable income is such gross income less adjustments allowable under various tax laws and other provisions. Such adjustments bases itself on the nature of income and expenditure. Opting for the income or expenditure heads that allows maximum set-offs from the gross income reduces taxable income, and by extension tax liability.

An underestimated dimension of tax planning is timing investments and financial transactions so that the tax liability for such transactions arises at the farthest possible time. While this does not reduce the amount of tax payable, it delays tax outgo, thereby effectively providing interest-free cash on hand. Individuals may not need to resort to such a strategy, but delayed pay-out is valuable for small businesses that very often face cash flow difficulties.

Tax Planning Benefits

The obvious benefit of tax planning is reduced tax liabilities, which by extension means the individual or the company retaining more money for their own needs.

Businesses reducing their tax liability through tax planning can provide better returns to their investors and better wages to their employees. It can also spend the money otherwise payable as tax to increase working capital and thereby improve performance efficiency, or spend more on capital expansion and thereby expand market share.

Individuals applying tax planning will have more disposable income in their hands. Very often tax planning provides individuals with money to spend for their personal benefit or enjoyment, and failure to apply tax planning may lead to such money paid as tax.

Tax planning also provides an indirect benefit of allowing a sound control over finances. It provides a valuable road map to plan finances in the most optimal manner. It allows streamlining cash outflows, making planned expenditure, and committing to an informed investment decision.

The Tax Planning Process

Tax planning is much more than simply opting for the investment or financial route that offers the maximum tax breaks. It also does not entail making unnecessary expenditure or needless investment solely for reducing taxes.

Good tax planning remains integrated and interlinked to a wider exercise that brings stability to financial goals. Apart from ensuring lower than normal tax outgo, the exercise requires considering other factors such as such as liquidity of the investment, risk appetite and the returns from the investment after factoring in inflation.

The basic process of tax planning involves

1. Preparing financial goals

2. Estimating tax liabilities on existing income and investments, and possible liabilities on additional investments or expenditures to realise financial goals

3. Acquiring a good understanding of all available tax exemptions, deductions rebates and allowances

4. Selecting the best investment or expenditure route that provides the most tax breaks but still fulfil the stated financial goals and fits in with one’s investment tastes and attitudes

The process requires planning for various taxes, such as income tax, capital gains tax, corporate tax, inheritance tax and offshore tax separately.

Income Tax Planning

Income tax is tax on an individual’s income, and depends on the income level. In the United Kingdom, the basic rate is 20 percent of an individual’s taxable income and the peak rate is 50 percent of taxable income.

Understanding the various exemptions or set-offs to gross income available allows making the necessary financial transactions to enjoy such set-offs. The most popular exemptions are contributions to certain charities and pension contributions attract exemptions.

The biggest applicability of income tax planning is for the self-employed and owners or directors of businesses. The law allows making set-offs of allowable expenses from the gross business income. Some such allowable expenses are business mileage or fuel when using own vehicle or company car for business purposes, professional fees and subscriptions, tools and specialist clothing, purchase of certain capital machinery and more. People working from home may claim set off for some household expense and travelling costs.

Capital Gains Tax Planning

Any individual or entity attracts capital gains tax when they make profit from the sale of assets such as stocks, gold and jewellery, property, and other items outside the scope of normal business inventory. The capital gain tax rates in the UK ranges from 18 percent to 28 percent of the profit beyond a fixed threshold value.

As in the case of other taxes, the law allows exemptions, or deducting some amounts from the capital gain before calculating the profits eligible for tax. For instance, sale of principle private residence, investment in selected start-up ventures and profits from gilt funds are exempt from capital gains tax. Profit from companies where the individual owns 5 percent or more shares for a minimum of one year attracts a special 10 percent capital gains tax rather than the standard 18 or 28 percent tax. The law also allows set off of any capital losses from capital gains.

Corporate Tax Planning

Corporate tax or Corporation tax is tax payable on the profits made by companies, and on profits of permanent establishments of non-UK resident companies and associations that trade in the EU.

The corporate tax in the UK starts from a slab of 10 percent and extend to a maximum of 30 percent, depending on the profit amount. Like all tax, corporate tax is on “taxable profits” or “chargeable gains” rather than gross profits. In UK, the calculation of such “chargeable gains” is on lines with capital gains tax, but without the relief applicable to individuals. However, companies can instead claim an indexation allowance to offset the effect of inflation.

Inheritance Tax Planning

Inheritance tax applies to “transfers of value”, or estates of deceased persons, gifts made within seven years of death, and transfers into certain types of trust.

The tax rate is 40 percent and the threshold value for the applicability of this tax is £325,000 in 2011-12. The law, as always, allows certain exceptions, which means that with careful planning, it becomes possible to pass on assets without having to pay Inheritance Tax.

Some of the major exceptions allowed are

• Gifts paid during one’s lifetime to spouse or civil partner

• Gifts made to a qualifying charity during one’s lifetime or by a will

• Gifts of £3,000 to anyone, in part or whole, every year. It is also possible to avail the unused allowance from previous years

Similarly, if the estate in question is a business, woodland, heritage or farm, there is some relief from the normal rates. Individuals would do well to consider such options, and plan or allocate their assets to eliminate or significantly reduce inheritance tax liability.

Offshore Tax Planning

Setting up companies abroad to save on corporate tax is an option for big corporate with multi national operations. For instance, while the corporate tax in UK is 28 percent, it is only 12.5 percent in Ireland, and Bermuda has no corporate tax. Special rules reduce the tax liability of non-residents on certain types of UK income. A careful consideration of such regulations allows leveraging the best possible solution.

However, residence and domicile status have big tax implications. UK residents who are also UK domiciled are liable to pay UK income tax and capital gains tax on their income and gains from anywhere in the world. UK resident but non-UK domiciled people can opt out of UK income tax and capital gains tax on foreign income and gains until the time they remit the money to UK. Opting for such a remittance basis may however be the expensive option.

Tax Planning Strategy

A good tax planning exercise involves drawing up the various tax saving options that fit the required financial goals, comparing the pros and cons of such options to decide on an appropriate plan.

Many people delay tax planning until the last possible moment, which is the end of the financial year. This limits the options available, and very often results in missing tax breaks, or making investments that saves tax but ill-suited to the desired financial goals.

For best results, make tax planning an ongoing exercise. A good time to delve into a detailed tax planning session is during the middle of the financial year, when both the accrued expenditures and the proposed expenditures for the financial year would become apparent.

Corporate Tax Planning – Frequently Asked Questions

What is Corporate Tax?

Corporate tax is tax on profits made by companies actively engaging in trade or other commercial activities. Companies, public corporations, unincorporated associations such as clubs, trade associations, industrial and provident societies pay corporation tax on profits. Privatised utilities pay an additional windfall tax on excess profits. Companies extracting oil or gas from the North Sea also pay petroleum revenue tax.

What is the rate of corporation tax in UK?

The main rate of corporation tax, applicable to companies that report profit in excess of £150,000, is 26 percent. Companies with profits below £300,000 may claim marginal relief and pay tax at the small profits rate of 20 percent. Companies with profits between £300,001 and £1,500,000 may also avail marginal relief and pay a proportionate lower tax that start from 20 percent and extend to 26 percent depending on the net profits.

How is Corporation Tax Computed?

The company’s net profits and capital gains attract corporation tax. The computation of profits takes place the same way as individual income tax and capital gains tax, with the major difference being the absence of exempt amount and different relief and allowances for corporation tax.

The law allows deducting most direct expenses from revenues to arrive at the net profit for the purpose of corporation tax. Companies with investment business and life assurance companies may also deduct certain indirect expenses. A notable exclusion from allowable expenses is expense incurred on entertaining clients.

The financial year for the purpose of corporation tax is April to March. Companies may however carry forward trading loss back for one year and set it against the profits of an earlier accounting period. It is also possible to carry forward trading loss and set such loss against any future trade income.

When an accounting period overlaps 31 March, the company may appropriate the profits between the two financial years in question, on time basis.

Companies qualifying for marginal relief need to calculate corporation tax due at the main rate and then subtract the allowable marginal relief from the tax due.

What are the relief and allowances available for corporation tax?

Apart from marginal relief, the law allows capital allowances, research & development relief or tax credits, loss relief, group relief, dividend relief, expenses relief and credit relief. All these relief and allowance reduce corporation lax liability.

• Capital allowance allows companies to deduct invisible expenses such as depreciation when computing net profits.

• Research and Development relief allows deducting expenses on certain research and development projects from the net income. Such relief may lead to tax credits.

• Loss relief, as the name implies, allows set-off of losses to profits

• Companies belonging to a group may set off losses among themselves. For instance, one company making a trading loss may set off such loss against the profits made by another group company in the same accounting period. Such group companies may also transfer assets among themselves without attracting a “chargeable gain” at the time of transfer.

• Dividend income is excluded when computing corporation tax to avoid double taxation, as the company that disburses the dividend after tax.

• Companies with an overseas permanent establishment or receiving any foreign income may suffer from having to pay both foreign tax and UK corporation tax. Expense and credit relief provides double taxation relief for such foreign income.

What is capital allowances relief?

The normal computation of corporation tax is gross income or revenues minus direct expenses. This fails to take into account invisible costs such as depreciation. Businesses may avail the provision of capital allowances to gain relief on consumption or depreciation of capital assets that take place during the process of conducting the trade.

Plant and machinery, office equipment, furniture, tools, vehicles, and other common business assets are eligible for capital allowance relief, as are some buildings that require improvement or renovation. Assets taken on lease however remain ineligible for capital allowance relief.

Most businesses can claim an annual investment allowance up to £100,000. Certain specific expenditure such as new environment friendly cars, new zero-emission goods vehicles, designated energy-efficient equipment and others become eligible for 100 percent first year allowance.

The company may claim such deduction in the year of accrual, carry forward any unused capital allowances to later years or even carry back the unused capital allowances as trading losses.

What is Research and Development Relief?

Research & Development relief grants tax credits to companies, other than subcontractors, for ownership of any intellectual property resultant from the research and development projects conducted in-house, to resolve any scientific or technological uncertainty and enhance knowledge or capability.

Research & Development relief divides as small and medium sized enterprise (SME) scheme and large company scheme.

• Small or Medium-sized Enterprise (SME) Scheme, applicable for companies with not more than 500 employees and either an annual turnover not exceeding €100 million or a balance sheet not exceeding €86 million, provides the tax relief of 200 percent on allowable research and development costs. This means that for each £100 of allowable expenses on research and development, the net income for corporation tax reduces by £200. The rate is set to increase to 225 percent from April 01, 2012.

• Large Company Scheme, for companies with more than 500 employees and larger in turnover compared to SMEs, and which incur a minimum research and development expenditure of £10,000 for the year, allows tax relief on allowable research and development costs at 130 percent. This means that for each £100 of allowable expenses on research and development, corporation tax reduces by £130.

The situation may lead to payable tax credits at times!

What is Loss Relief?

Loss relief is one of the most commonly availed corporation tax reliefs. In a nutshell, it allows a company to set off its losses resultant from trading, disposal of a capital asset, or property losses against income and gains in the same accounting period, income and gains of the previous year or trading profits of the same trade in future years.

Companies ceasing trading may claim terminal loss relief. This allows set off of any trading losses in the final accounting period against profits in any or all of the previous three years, provided the company carried out the same trade.

The law treats capital losses differently from trading losses and does not allow offsetting such losses against trading income.

Losses on property income may offset against other profits in the same accounting period, or against property related profits in the next accounting year. The law however does not allow carrying back such loss to offset against profits from earlier accounting periods.

Group companies may offset losses on property income against profits of other member companies, but only if the company reports an overall loss.

What is Expense and Credit Relief?

UK based companies have to pay corporation tax on all profits from across the globe. However, expense relief allows deducting any overseas tax paid from corporation tax liability. Credit relief allows deduction from corporation tax liability an amount equivalent to UK tax suffered on the foreign income. Onshore pooling allows setting off overseas tax suffered in high tax territories against taxable income arising from low tax territories.

At times, moving the headquarters overseas may result in considerable corporation tax savings. For instance, an overseas holding company controlling UK operations allow the UK business to function as a sales and manufacturing service, to which the parent company pays commission. This transfers the tax liability to the overseas country where the corporate tax rate may be lower than the prevailing rates in UK.

What is Petroleum revenue tax?

Companies that earn profits from the extraction of oil and gas from the UK and its continental shelf pay petroleum revenue tax (PRT) in addition to corporation tax. PRT depends on the company’s share of the cash flow from each separate oil field, rather than on profits. The Department of Trade and Industry decides on the fields on geological grounds.

What are the relief and allowances available for Petroleum revenue tax?

Companies may avail various deductions and relief that reduce the PRT liability:

• When the company is in loss, that is expenditure is greater than income, the loss may be carried forward or backward indefinitely

• Uplift relief, or past capital expenditure given a supplement of 35 per cent to compensate for interest and other finance costs. In normal cases, PRT computation does not allow deducting such expenses.

• Exploration and Appraisal relief, which allows carry forward or set-off of offshore expenditure on exploration and appraisal against revenues in the same field.

• Unbelievable Field Loss relief, which allows transferring net losses of an abandoned field to a productive field

• Research Relief, which allows deducting from the revenue expenditure related to certain research projects

There also exist other allowances such as tariff receipts allowance, oil allowances and cross-field allowance, but only to a select few large companies can hope to avail of such allowance.

What are the advantages of Corporation Tax Planning?

A thorough understanding of corporation tax rules and its implications would allow reducing the tax burden legally. For instance, UK corporation tax rates are lower than income tax rates for high-income groups. Company owners may also pay themselves dividends, taxed less heavily than other income streams.

Capital Gains Tax Planning – Frequently Asked Questions

What is Capital Gains Tax?

Capital Gains Tax is a tax on profit or gain made when selling, gifting, transferring, exchanging, destroying or disposing off any asset for compensation. The gain, or the profit made, which is the selling price minus cost price attracts capital gains tax.

As a general rule of thumb, transactions that do not attract income tax attract capital gains tax. For instance, a property dealer would pay income tax on gains resultant from the sale of property whereas another individual indulging in one-off property transaction may pay capital gains tax rather than income tax for the transaction.

In UK, present capital gains tax rates are 18 per cent or 28 per cent depending on the income levels. The tax applies when the amount of capital gains is in excess of the annual exempt amount, which stands at £10,100 for 2010-11 and £10,600 for 2011-12. The annual exempt amount for most trusts is half the amount for individuals. Trust with mentally disabled beneficiaries or certain other disabled beneficiaries enjoy the same annual exempt amount of individuals.

Why opt for capital gains tax planning?

The importance of tax planning can never be understated, more so for capital gains planning. With careful planning and foresight, it becomes possible to reduce significantly, or even eliminate altogether this tax liability. A proper understanding of all the rules, regulations and stipulations allows one to plan investments and finances in a way that minimise capital gains tax outflow.

What are the assets that attract capital gains tax?

Most assets, regardless of whether situated in the UK or overseas become liable for capital gain tax when disposed. The law however allows some exemptions, such as

• Personal possessions such as jewellery or paintings disposed for £6,000 or less

• One car

• The principal or main residence

• Stocks and shares held in tax-free investment savings accounts

• UK Government or gilt-edged securities such as National Savings Certificates, Premium Bonds and loan stock issued by the Treasury

• Betting, lottery or pools winnings

• Personal injury compensation

Most assets other than these are liable to capital gains tax when disposed.

Do overseas assets qualify for capital gains tax?

UK residents are liable to pay capital gains tax for gains resultant from disposal of overseas assets. Non-domiciled residents may however claim remittance basis of capital gains tax, wherein the foreign gains become liable for capital gains tax only when bringing the gain to the UK.

Do gifts attract capital gains tax?

All gifts except ones made to spouse, civil partner or charity attract capital gains tax. Gift to a child, or transfer of assets in the basis of divorce or dissolving of a civil partnership attracts capital gains tax.

What is capital gains tax on property?

Gains from the sale of property such as a second home, rental property, business premises and agricultural land becomes liable for capital gains tax.

The main home also attracts capital gains tax, but the law provides for private residence relief that virtually exempts profits from the sale of the principal dwelling house from capital gains tax.

What is Private Residence Relief?

Private residence relief is the provision in law that exempts capital gains tax for a person’s primary or main residence, subject to the condition that the asset was in use only as a home. The gains resultant from disposal of a part of the house or the garden of the house, while retaining the remaining portion also qualifies for such a relief.

The relief is the full amount of capital gains tax, subject to fulfilling certain conditions:

• The garden or grounds, including the site of the house is less than 5,000 square meters

• The house is not let out in part of whole, or no more than one lodger resides at a time

• The intention of the transaction is not to make a quick profit

• No portion of the house is in use exclusively for any business purposes. If any portion is in use for business purpose, such portion becomes ineligible for the relief, on a proportionate basis

• If the house owner does not reside in the house, it should be for a genuine reason such as distance from work or the job requirements prevents the residence. Absence of more than four years however makes the relief void regardless of the reason. However, the law excludes last 36 months before the disposal for this purpose, meaning that during this time, the homeowner may choose not to reside there for any reason.

What is Letting Relief?

Letting relief is exemption from capital gains tax when renting the property. The maximum amount of letting relief due is £40,000 or the private residence relief due or the gain made on the let out part of the property, whichever is lower.

To illustrate, assume a person uses 70 percent of the house as his residence, lets out the remaining 30 percent and makes a total gain of £60,000 by selling the property. The property attracts private residence relief of £42,000 (70 per cent of the £60,000 gain) and a maximum letting relief of £18,000 (30 per cent of the £60,000 gain). This means that there is no capital gains tax to pay.

Does inheriting a property make one liable to pay capital gains tax?

Inheriting assets by itself does not attract capital gains tax, but when the disposing the inherited asset, the profits from the time of originally acquiring the asset rather than the value at the time of inheritance attracts capital gains tax.

Do profits from shares, unit trusts and other investments attract capital gains tax?

Disposal of stocks and shares in a company, units in a unit trust, debentures, bonds excluding premium bonds and investments in companies or in the government are liable to capital gains tax. There is however, no capital tax payable when replacing one set of shares by another set of shares following company reorganisation or take-over.

Gifting of shares to spouse or civil partner do not attract capital gains tax, provided the gift is not trading goods bought for resale, and the partners have lived together. However, when the spouse or civil partner sells or disposes of the shares, it attracts capital gains tax at the original purchase price and not at the value at the time of receiving the gift.

Shares acquired through share incentive plans, “Save as you earn” schemes and company share option plans may be exempt from capital gains tax or may enjoy a discount.

What is Negligible Value Claim?

At times, shares on hand become worthless owing to company liquidation or some other factors. In such cases, it becomes possible to make a “negligible value claim” for capital loss, and set off such loss against other capital gains.

Negligible value claim assumes selling the shares on the date of application, and then buying it back in either of the two previous tax years

What is Gift Holdover Relief?

Gift hold over relief allows postponing the capital gain tax.

When gifting business assets, or unlisted shares of trading company where the taxpayer holds a minimum of five percent of voting rights, the taxpayer can claim gift holdover relief. With this relief, the tax is not due, or is “held over” until the person who receives the shares disposes of them. The held over gain is based on the market value of the shares on the day the taxpayer no longer owns it.

What is Enterprise Investment Scheme?

Enterprise Investment Scheme is tax incentives on investing in small, unlisted companies. The scheme allows deferral of capital gains tax when reinvesting a gain on an asset in shares enterprise investment scheme shares. The investment in such shares has to take place between one year before and three years after disposing the original assets.

What is Roll-Over Relief?

Employees may claim roll-over relief for capital gains tax when the employer operates a share incentive plan and the employee disposes off shares in an unlisted company to the trustee of such share incentive plan.

Business roll-over relief applies when when the proceeds of disposal of an asset finds use to buy another asset that attracts capital gains tax. In such cases, capital gains tax applies only when disposing the newly acquired asset.

What is capital gains tax on antiques, jewellery and other personal possessions?

Disposing chattels or personal possessions worth more than £6,000 attract capital gains tax

Possessions that attract tax include artwork such as a painting, antiques, jewellery and more. Items with an expected useful life of less than 50 years and not used in trade or job, such as a caravan or motorboat are exempt.

What is capital gains tax on Business assets?

Many business assets such as the premises, fixtures and fittings, shares, and even intangible assets such as registered trademark and goodwill are liable to capital gains tax. However, the business may avail of business asset-roll over relief, entrepreneur’s relief, or incorporation relief.

Business Asset Roll-Over relief is exemption from paying capital gains tax when selling a business asset and re-investing the proceeds in a new business asset, between one year before and three years after the date of disposal of the old asset.

Entrepreneurs’ Relief is exemption from capital gains tax when selling shares in a trading company or the holding company of a trading group, when the taxpayer has worked for the company or own at least 5 per cent of the ordinary shares in the company with voting rights. The capital gains tax rates for gains that qualify for entrepreneurs relief are 10 percent rather than the normal 18 or 28 percent.

Incorporation relief is exemption from paying income tax when a sole trader or partner transfers the business to a company

Income Tax Planning – Frequently Asked Questions

Why should individuals resort to income tax planning rather than make a straightforward calculation and pay the tax liability?

Regardless of whether anyone engages in employment, self employment or business, income tax is more or less a certainty. However, income tax is not levied as a straightforward percentage of the total income. The law provides many allowances and relief, and exploiting such provisions allows reduction of income tax liability considerably. The many conditions that come with availing such benefits make income tax planning indispensable.

What is Taxable Income?

Income Tax is a tax on income. However, not all income attracts income tax. Generally, income from employment or self-employment, pensions, interest of savings, dividends from shares, rental income and income gained from a trust attract income tax, subject to certain relief or allowance that the law may allow.

Taxable income includes income from:

• Employment, including income from full, part-time and temporary employment, most perks or benefits associated with the employment, net profits from self-employment

• State or personal pension, retirement annuity, pensioner bonds and trust income

• Interest on savings from bank and building society interest, national Savings and Investments accounts and bonds, dividends on company shares

• State benefits such as Carer’s Allowance, Jobseeker’s Allowance, Employment and Support Allowance, Incapacity Benefit beyond 29 weeks and Weekly Bereavement Allowance

• Rental income from a lodger, if more than £4,250 a year in only house, or the entire rental income from a second property

The UK tax year runs from 6 April to 5 April, and the taxable income attracts income tax at different slabs depending on the income level.

What is non-taxable income?

The law ignores certain income when computing “taxable income,” meaning that such incomes are exempt from income tax. The most common of such non-taxable income are

• State benefits such as Disability Living Allowance, Attendance Allowance, Lump sum Bereavement Payments, Pension Credit, Winter Fuel Payments, Housing Benefit, Income based Employment and Support Allowance, First 28 weeks of Incapacity Benefit, Child Benefit, Guardian’s Allowance, Maternity Allowance, Industrial Injuries Benefit, Severe Disablement Allowance, War Widow’s Pension and Young Person’s Bridging Allowance

• Interest on individual savings accounts and savings certificates

• First £4,250 of rental income from a lodger in the individual’s only home

• Working Tax and Child Tax Credit.

• Wins from Premium Bonds

The law also provides many other relief and allowances that reduce Income Tax liability on taxable income.

What is “Savings” and “Non Savings” Income, and how does it make a difference on Income tax liability?

“Non savings income” is income from employment or self-employment, most pension income and rental income.

“Savings income” is basically dividend income from shares in UK companies. Such income adds on to non savings taxable income and is taxed last, meaning that taxes on savings income occur at the highest applicable income tax band.

What are the allowances and relief that reduce Income Tax?

A number of allowances and relief make it possible to reduce the income tax liability on taxable income.

The law provides a certain income tax-free “personal allowance” for individuals with annual income less than £100,000. For 2011-12, this basic Personal Allowance is £7,475 for people below 65 years, £9,940 for people between 65 and 74 years, and £10,090 for people above 74 years. Taxable income up to this amount attracts 0 percent tax.

The other allowances available on taxable income are:

Married Couple’s Allowance, for spouse or civil partner born before 6 April 1935. The allowance depends on the individual’s income, subject to a maximum allowance of £7,295 and the minimum amount of £2,800. The tax benefit is 10 per cent of the allowance amount.

Maintenance Payment Relief for tax payer, former spouse or civil partner born before 6 April 1935. The tax relief is £280 for maintenance payments above £2,800 or more a year, or the actual amount paid for maintenance payments less than £2,800.

Blind Person’s allowance, for people registered blind or unable to perform any work which requires eyesight. The allowance is £1,980 without any age or income restrictions.

Contributions to company or public service pension schemes and charities attract further income tax relief.

How Do Pension Payments Result in Income Tax Relief?

Payment of pension does not result in direct income tax savings. However, the pension provider claims back tax from the government at the basic rate of 20 per cent. This means that for every contribution of £80, the payee gets £100 worth of pension. Higher rate taxpayers (those in the 30 percent or 40 percent slab) may claim the corresponding difference by making a claim through telephone or letter. Additional rate taxpayers (50 percent) may claim the difference through tax return.

How do Donations Help to Reduce Income Tax?

Gifting of land, property or qualifying shares and securities to a charity, or selling such assets to a charity at less than market value attracts both income tax and capital gains tax relief. The value of such gifts is deducted from the taxable income.

In addition, the “Gift Aid” and “Payroll Giving” schemes, while not providing direct tax relief, increases the value of the donation by allowing the recipient to reclaim from the government the tax paid on such donations.

How does Gift Aid work?

Gift Aid does not result in any direct tax savings, but allows increasing the value of donation to charities and community amateur sports clubs (CASC). The law allows the charity or the CASC receiving the donation to reclaim the 20 percent basic rate tax on the donation. People paying tax at the higher rate can claim the difference through tax return.

How does Payroll Giving work?

Payroll Giving is making donations to charity directly from payroll or pension. The employer, on authorization from the employee deducts such donations after contribution to National Insurance but before Income Tax deduction. This means only the amount left over after the donation attracts income tax, effectively providing tax relief at the highest rate of tax.

Do Availing Company Benefits Rather than Salary Help to Reduce Income Tax Liability?

An employee or a director of a company may claim income tax relief for the amount spend on travelling for work related purposes, purchase of work clothes or tools, professional fees, expenses for working from home and other expenses related to doing the job. The law allows deducting such expenses from total income before deriving taxable income. However, company directors with annual income of £8,500 or more, including the value of benefits; do not enjoy such exception and have to pay tax on all benefits.

Employees working in a company may enjoy benefits such as value of food availed from the staff canteen, car parking near place of work, hot drinks and water at work, mobile phone, Christmas parties and childcare without paying tax on such benefits.

The value of most other benefits such as company cars and fuel spend on them, medical insurance, living accommodation and loans with at low interest or interest free loans greater than £5,000 attract income tax. The value of such benefits is included when calculating taxable income.

There are certain grey areas in deciding whether value of work related benefits attracts income tax or not. For instance, the benefit accruing out of living accommodation provided by the company attracts income tax liability by default, but if one can prove that such accommodation allows doing the job better, then it is ignored when calculating taxable income. Similarly, the value of medical insurance benefit attracts income tax, but insurance to cover treatment when working abroad and value of annual check-ups are exempt from income tax.

What are income tax breaks available for self-employed?

Self-employed individuals may claim income tax relief for all business related expenses, such as purchase of capital machinery, stock or materials, payroll expenses, costs associated with renting and maintaining business premises, business travel costs, advertising expenses, legal and professional fees, and other general office costs.

Items used both for business and personal use, such as a telephone or use of car still become eligible for income tax relief. The law allows splitting up such expenses and claiming tax relief for the proportion used for business purposes, provided such a split up is possible. The single biggest test on whether the expenditure would be entitled for tax breaks is whether the personal received any private benefit from the expenditure. The law holds that the person should have received such a benefit, and that any personal benefit was incidental and not the reason for the expenditure

However, certain expenditure such as cost of entertaining guests do not quality for income tax exemption.

The key requirement to claim such tax relief is to maintain proper and detailed records of business expenses

How does the type or nature of occupation influence income tax?

Certain self-employed professionals may avail income tax relief by averaging their income. For instance, farmers, market gardeners or artists may reduce income tax liability by averaging profits over two years.

In many cases, self employed professionals may be better off incorporating their business. UK corporation tax rates are much lower than top income tax rates, and moreover dividends are taxed less than other types of income.

The law also allows a spouse or partner to run the company and split the income, which would almost always lower the income tax bill.

Individuals with business losses may claim overlap tax credit by setting off the loss through other income for the same or previous years.

Inheritance Tax Planning – Frequently Asked Questions

What is Inheritance Tax Liability?

Inheritance Tax is tax on the estate of a deceased person.

The government fixes a threshold value, and if the value of the deceased’s estate adds up to above this threshold limit, the estate attracts inheritance tax at 40 percent of the amount over the threshold value. The threshold for 2011-2012 is £325,000

Who is liable to pay Inheritance tax?

Inheritance tax is payable within six months of death of the estate owner. The liability of payment falls on the executor of the will or the personal representative of the estate owner. When the estate owner dies without a will, the administrator becomes liable to pay the tax. When assets transfer to a trust, the person making the transfer or the “settler” is liable to pay the tax.

The tax payable is due from the dead person’s estates. Since it is not always possible to convert the estate to cash form within the six-month deadline, the executor, administrator or settler usually pay from their own pocket and recover the expenses from the estate later.

In normal circumstances the beneficiaries or recipients of the estate do not become liable to pay inheritance tax. However, if the executor or the trustees cannot pay Inheritance Tax, the beneficiaries who receive any share of the estate or the person who received a gift from an estate-holder who died within seven years of making the gift becomes liable to pay the tax. The tricky issue here is that if the total value of the estate is above the threshold value, the individual recipient of a gift becomes liable to pay inheritance tax even if the gift in his or her possession is below the threshold limit.

Joint ownership of estates with total value above the threshold limit may make the surviving partner liable to pay inheritance tax on the share of the deceased partner.

How to Save Inheritance Tax?

Estates that pass on to spouses or civil partners are exempt from inheritance tax, even if the value of such estates are higher than the threshold limits. Estates that pass on to anyone else, including brothers, sisters, children and grandchildren attract inheritance tax. The law nevertheless allows various exemptions on inheritance tax.

Proper awareness of such exemptions and sound inheritance tax planning makes it possible to reduce significantly or even avoid having to pay inheritance tax.

Apart from transferring assets to a young spouse, the ways to save on inheritance tax are by making gifts, making donations, making certain pension contributions, and selecting the right type of assets such as business or agriculture assets. Some other methods such as changing domicile also works.

How to Save on Inheritance Tax by Making Gifts?

In normal course, if a person makes a gift to anyone and survives for seven years from the date of making such a gift, the value of the gift is exempt from inheritance tax. This holds true regardless of the type, nature or value of the asset.

Gifts made to spouse or civil partner with permanent residence in the UK, during the estate-owner’s lifetime or through will is fully exempt from inheritance tax. Gifts to unmarried partner, or a non-registered civil partner are however not exempt and attract inheritance tax.

Conditional gifts or gift with “contractual obligations” that allows the estate-owner to continue benefiting from the estate render the exception void, and in such cases, the gift still becomes liable for Inheritance Tax even if the estate owner lives beyond seven years after making the gift. For instance, if a house owner bestows his house upon his son but still resides in the same house without paying rent, the house still attracts inheritance tax.

Inheritance tax laws also contain certain additional provisions that exempt gifts from inheritance tax even if the estate owner dies within seven years from making the gift. Such gifts are:

• An individual making a gift up to £3,000 each year, either as a single gift or as several gifts. The law also allows carry over of any unused allowance for one year. A person not making a gift in a year may effectively make an inheritance tax-free gift of £6,000 the next year.

• Unlimited small gifts of £250 to any number of individuals

• Gifts for wedding or civil partnership ceremonies. Parents may provide tax-free worth £5,000. Grandparents and great grandparents may gift worth £2,500, and others may gift worth £1,000

How to Save Inheritance Tax by Making Pension Contributions?

Pensions offer another way to save on Inheritance Tax.

Transfers into a qualifying pension scheme, including some non-UK schemes is exempt from inheritance tax. Any left-over funds in a pension scheme, paid to any dependent as pension benefits, or to a charity do not attract inheritance tax.

However, all other cases of left-over funds, including funds paid as lump-sum death benefit attract Inheritance Tax.

How to Save on Inheritance Tax by Making Donations?

Another option to avoid inheritance tax is by donating to charities. The law exempts from inheritance tax any gifts made to “qualifying charities” during the estate owner’s lifetime or in the will. All registered European Union charities may pass the test of “qualifying charity.”

Donations to some national institutions such as museums, universities and the National Trust, or contributions to any UK political party that has at least two members elected to the House of Commons or has one elected member with the party having received at least 150,000 votes also remain exempt from inheritance tax.

How to Avoid Inheritance Tax by Choosing Nature of Assets?

The nature or type of the estate can alter inheritance tax liability.

Tax laws allow relief from inheritance tax if the estate is a farm, woodland or National Heritage property. The law also allows relief for estate held as a business.

What Holdings Qualify for Agricultural Relief?

The following agricultural holdings do not attract inheritance tax, provided the estate owner holds such assets for a minimum of two years before death

• Agricultural land or pasture. Farmhouses, cottages or buildings in such lands also qualify provided its size and nature matches the farming activity

• Buildings used for intensive rearing of livestock or fish

• Stud farms for breeding and rearing horses

• Growing crops transferred with the land

• Short-rotation coppice, or trees planted and harvested at least every ten years

• Land not farmed actively to preserve the countryside and habitat for wild animals and birds under the Habitat Scheme

• Value of timber in woodlands, unless the timber is sold and exemption claimed under Business relief

Farm equipment and machinery such as tractors, derelict buildings, harvested crops and livestock do not qualify for inheritance tax exemption. The land value of woodlands also does not qualify for relief.

What Holdings Qualify for Business Relief?

The following business holdings do not attract inheritance tax

• Shares that give the shareholder control of the company. Shares that provide the estate owner with more than 50 percent of the voting rights provide 50 percent relief from inheritance tax.

• Shares in a trading company or group that does not have excess cash or investment, provided the share is with the estate owner for a minimum of two years

• Land, buildings, plant or machinery used for the business during the last two years before the business was passed on, or held in a trust from which the estate owner can benefit

Estate owners may gift the business property or assets that qualify for business relief when alive without putting the business relief at risk, provided the recipient continues with the business until the original estate owner’s death, or until seven years have passed, whichever is earlier.

How Changing Domicile Helps in Inheritance Tax Planning?

UK Inheritance Tax it based on domicile rather than residence. A permanent move to a new country with no intention of returning to live in the UK allows saving on inheritance tax.

This is difficult, but by no means impossible. Success depends on developing a thorough affidavit that documents the intentions, facts, and reasoning to support the new domicile claim. After having taken a new domicile, wrapping UK assets into a suitable offshore structure provides an exemption. UK has Double Tax Treaties relating to inheritance taxes with France, India and a few other countries, which may help the estate-owner to select the best possible option.

Why is Inheritance Tax Planning Important?

The many exemptions available make sound inheritance tax planning essential to minimise tax liability. Failure to do so would result in a significant portion of the assets painstakingly build up over the years or passed on from generations to generations falling into the hands of the government, with the heirs unable to benefit fully from such assets.

Film Tax Relief Extended to 2015

Tax Planning News: The government announced last week that it will be extending Film Tax Relief, its targetted tax-break for the UK Film Industry, to the end of December 2015. IFAonline reports -

“The scheme promotes the sustainable production of culturally British films and in 2009/10 provided some £95m of support to the British film industry, supporting over £1bn of investment in 208 films.

Prime Minister David Cameron said: “I am delighted to announce the extension of film tax relief to the end of 2015, guaranteeing millions of pounds of support for the British film industry.

“The last year has seen massive success, both at home and abroad, for a whole host of UK films. I look forward to seeing the UK film industry continue to thrive over the coming years, supported by the Government’s film tax relief.”"