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The Annual Allowance for pension contributions is now £40,000, though to the extent that this has not been used it can be carried forward for up to three years.
Currently, contributions qualify for tax relief at the investor’s highest marginal tax rate, but some Government ministers have suggested that relief should in future be standardised at perhaps 30%. Higher rate taxpayers might therefore be minded to contribute sooner rather than later.
The maximum size of pension pot which can be accrued during the investor’s lifetime without incurring a tax charge is £1.25 million, though people whose pension savings exceeded this figure as at 6 April 2014 can apply to “protect” savings of up to £1.5 million from tax.
Non-working wives and others with no pensionable earnings are entitled to invest up to £2,880 p.a. in a personal pension and to have their investment topped-up by the Government to £3,600.
If one of the partners in a marriage or civil partnership has not used the whole of their personal tax allowance or basic rate tax band, they can save tax by transferring income-producing assets to the other partner. HM Revenue and Customs has no concerns when transfers of property or investments are made in this way, but may object to transfers of shares in private companies.
The personal tax allowance is reduced by £1 for every £2 of income over £100,000, which means that the value of the £10,000 allowance will have been totally eliminated by income of £120,000. The best way of reducing taxable income to £100,000 or below is to make pension contributions or eligible gifts to charity via Gift Aid.
Pensions are the most tax-efficient investments, but for reasonably cautious investors the next most tax-efficient are New Individual Savings Accounts (‘NISAs’).
NISA contributions do not qualify for tax relief, but the underlying investments enjoy the same tax-treatment as pension savings, and the proceeds are tax-free. Furthermore, as from 6 April 2015, investors will be able to pass their NISAs to their spouses or civil partners on death with the tax breaks intact.
There is no facility to carry forward the annual allowance for NISA investment, so it’s “use it or lose it”!
For the less risk-averse, Venture Capital Trusts and Enterprise Investment Schemes offer tax benefits which is some cases extend to relief from inheritance tax, subject to the investment having been held for at least two years prior to death.
For basic rate taxpayers the standard rate payable is 18% on gains arising on the sale of assets including investments and buy-to-let properties although the rate rises to 28% for higher rate taxpayers. However, the first £11,000 of gains is tax-free.
Transfers between spouses can enable savings of capital gains tax in the same way as with income tax.
To protect against tax on future gains, it might be worth considering selling investments and re-purchasing them in an ISA.
Officers and employees of unquoted companies may be able to claim entrepreneurs’ relief, whereby capital gains tax on the sale of their holdings is reduced from 28% to 10%.
To qualify, the taxpayer must have been an officer or employee for at least 12 months prior to the sale and have owned at least 5% of the shares and voting rights during that time.
The rapid increase in house prices means that a growing number of deceased’s estates are now suffering inheritance tax.
The first £325,000 of the value of an estate qualifies to be taxed at the nil rate, which means that it is free of tax. But the excess over this figure is taxed at 40%; and the ‘nil rate band’ will be frozen at £325,000 until 2019.
However, for married couples and those in civil partnerships, any proportion of the nil rate band which is not used on the death of the first of the couple to die can be carried over and added to the nil rate band of the survivor.
A number of other exemptions from inheritance tax are available. £3,000 may be transferred annually and greater sums on marriage (£5,000 from parents and £2,500 from grandparents). In addition, any number of small gifts of up to £250 can be made without attracting tax.
The most generous exemption is for gifts of whatever size which are made more than seven years before death and qualify to be regarded as Potentially Exempt Transfers.
There is also an exemption for gifts, again of whatever size, which are made on a regular annual basis out of surplus taxed income, without affecting the donor’s normal standard of living. However, the Revenue will require evidence of income and outgoings and the amounts transferred.
Gifting to charity is again encouraged, and a special rate of 36% applies to the whole of a taxable estate if 10% is left to charity. Bearing in mind the fluctuating values of assets, Wills must be drafted carefully if advantage is to be taken of this concession.
All views are the authors own and do not represent those of SG Financial Services Limited.
DISCLAIMER: Any forecasts, figures, opinions or investment techniques and strategies set out, unless otherwise stated, are Simmons Gainsford Financial Services’ own. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. They may be subject to change without reference or notification to you. The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment and the material should not be relied upon as containing sufficient information to support an investment decision. It should be noted that the value of investments and the income from them may fluctuate and investors may not get back the full amount invested.