Eleventh hour higher rate tax dodges for investors
In just two months some of you will be facing income tax rates of up to 60%. Tax boffins have been inventing some pretty complex schemes to avoid these. But are there some simple steps you could be taking now?
Starting with the solution
If you want to avoid being caught by the new higher rates of income tax for 2010/11, the solution is simple: reduce your income for that year. But who wants to cut their income?
Having your cake and…
The idea of cutting income is rather drastic and only worthwhile if you can recoup it later when, hopefully, the tax rates drop. But that could leave you waiting a long time. An alternative solution is to shift your income to either:
• the current tax year where the top rate is 40% and not 60%; or
• to someone whose top rate of tax will be 40% (or less) even after the April 6 rate increases.
What’s it worth
From April 6 2010 those with taxable income of more than £150,000 are liable to pay tax at 50% on income above that level. While those with income of between £100,000 and £113,000 are worse off, they’ll pay up to 60%. Shifting, say, £5,000 of income from 2010/11 to 2009/10 can save you up to £1,000 (£5,000 x (60% - 40%)). But how’s it done?
Keep it simple with investments
As mentioned above there have been some fairly complex schemes put forward, but why make things complicated if you don’t have to?
Tip. Closing a bank or other interest-producing account before April 5 2010 can shift interest that would have been paid in 2010/11 into the current tax year. This idea works best with accounts that pay interest only once or twice a year, or which have a lot of money in them.
Example. On May 1 2009 Jim invested £50,000 in a fixed 4.9% twelve-month account. It’s due to pay interest of £2,450 on April 30 2010, i.e. in the 2010/11 tax year. He closes the account on March 31 2009 and the bank pays him interest of £2,245 on that date. By advancing the interest into 2009/10 he’s saved himself up to £450 in tax (£2,245 x (60%-40%)).
Trap. Banks etc. can charge penalties for closing fixed-term accounts early. You’ll have to compare this cost with the amount of tax you’ll save.
Giving it away
For investment assets other than deposit accounts, the way to dodge the new higher rates may be even more simple. The new higher rates have breathed new life into the idea of asset shifting.
Example. Jack is a company director with earnings of £95,000 per year after his personal tax allowance. He also receives income from stocks and shares etc. totalling £15,000. Gill, his wife, is also a director and has total annual income of £50,000 per year. It’s never been worth shifting income between them before as they both paid tax at the higher rate of 40%. But now if Jack transfers sufficient investments to Gill, so that his taxable income falls below £100,000, they’ll save £2,000 of tax per year (£10,000 x (60% - 40%)).
Note. The spouse making the gift is deemed to sell the asset to the other spouse at a value that doesn’t produce a capital gain or a capital loss, i.e. it will not trigger any Capital Gains Tax.
Tip. If your taxable income will be more than £100,000 for 2010/11, but your spouse’s will be below that, transferring income-producing investments to them will cut your joint tax bill.
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