Do you want to pay less tax?

It’s fast approaching the end of another tax year. So now is a good time to do some tax planning if you want to pay less tax. Don’t wait until you receive your 2006/07 self assessment tax return… it’ll be too late then.

Savings that save tax!

Have you used up your ISA (Individual Savings Account) limit this tax year? Currently up to £4,000 could be invested into a shares Mini ISA and £3,000 into a cash Mini ISA, (or up to £7,000 for a Maxi ISA) each tax year.

The government have proposed to make ISA’s a more permanent type of investment, by bringing PEP’s within the ISA wrapper, removing the maxi/mini distinction, having an overall annual investment limit of at least £7,000, and allowing all Child Trust funds to be rolled into ISA’s on maturity. Investments in ISAs are exempt from Income Tax and Capital Gains Tax.

Income Tax relief of 30% is available on investments up to £200,000 into a Venture Capital Trust (VCT). Any dividends received would be exempt from income tax and the eventual sale of the shares would be exempt from Capital Gains Tax, providing certain conditions are met.

Income Tax relief of 20% could be enjoyed on investments up to £400,000 into an Enterprise Investment Scheme (EIS). The eventual sale of the shares would be exempt from Capital Gains Tax, providing certain conditions are met. Under current legislation EIS investments maybe exempt from Inheritance Tax after two years of holding such an investment. Not only that, but it may be possible to defer any other personal capital gains into the investment to avoid paying Capital Gains Tax now.

If you are setting up a business then there may also be scope for investing in it to enjoy the same tax breaks as the EIS investment.

Financial advice should always be sought to ensure the right investments are made for your circumstances and the risks you wish to take.

Organise your Investments to save Tax

Couples - have you put any savings or shares that are not tax free into the name of whoever pays the lower rate of tax? If not then it may be worth doing so to reduce your combined tax bill.

Investments that produce gains rather than income may well be more tax efficient for some. With careful management capital growth in investments may well be achieved without paying tax, as opposed to paying income tax on income generating investments. In 2006/07 up to £8,800 in total gains (after reliefs, such as taper relief) can be received tax free.

Losses on shares can still be realised by selling and purchasing them back within an ISA, or by selling shares and your spouse buying them. Losses can then be set against gains on other assets in the same year, or later, to reduce Capital Gains Tax.

Over 65’s could consider investments which do not count as their taxable income. If taxable income exceeds the annual limit (£20,100 for 2006/07) then the age related allowance available will reduce. By taking careful action personal tax bills can be reduced, without the need for giving away investments.