Use your tax breaks

Benjamin Franklin's view that nothing is certain except death and taxes has yet to be disproved. However, using the tax allowances granted by the Government can at least help mitigate the tax side. At the basic level, there is a personal income tax allowance, an annual exemption from capital gains tax plus numerous tax credits dependent on your circumstances. Schemes like Gift Aid offer tax relief on donations to charity and there is also an Inheritance Tax (IHT) threshold below which nothing is due. Alongside, there are tax efficient investment products, such as Individual Savings Accounts and pensions, which provide relief from both income and capital gains tax (CGT) to differing extents. In addition, some individual assets are specifically exempt from CGT - your home, your car, certain personal jewellery, antiques and UK Government bonds (gilts). In terms of IHT, for the 2010/11 tax year, the threshold is £325,000 (£650,000 for married couples and civil partners) and the value of your estate above this is liable to tax. This can leave beneficiaries having to sell family heirlooms to pay the tax bill. However, there are exemptions available from this tax as well, and a little bit of planning can help you access the range of annual exemptions and allowances in advance. This can help you reduce the liability as far as is practical – or provide the means with which your beneficiaries can pay it without having to sell items of sentimental value.

A new political dawn

After a couple of nail-chewing weeks, the UK finally has a new government. It may not be quite what markets would have wished for - equally it is not as bad as they might have feared. But this is unchartered territory with the UK coping with an economic crisis and a political set-up not seen for a generation. Do investors need to prepare themselves for a bumpy ride? Or are the new government’s policies likely to bring stability? First, it must be said that some measure of certainty is welcome. Markets hate uncertainty and the mere fact that a government has been formed has allowed them to concentrate on other areas (like the crisis in the Eurozone). The pound has seen a small rally against the Euro since the election, though this may be more a function of the potential weakness across Continental Europe than a vote of confidence in the new government. More certainty of government is good for gilts, as is the fact that all the major rating agencies said that the outcome of the election had not changed their view on the outlook for the UK. That said, many other problems remain: Over-supply continues to be an issue and the rating agencies may not look so favourably if credible steps are not taking relatively quickly to deal with the deficit. All eyes will be on the new budget on 22nd June. Coalition is not a disaster. Markets had expected a hung parliament and the current compromise is probably as good as they could have hoped for. The true extent of the compromise is unlikely to be seen until the first budget. Watch this space.

What does it mean?

What does our new coalition Government mean for your financial plans? The UK economy is running an unprecedented deficit so we can be sure that somewhere, one or two taxes will rise. In the spirit of compromise, there will be no imminent rise in the Inheritance Tax threshold and the priority is instead a rise personal income tax allowances. Alongside, however, the Prime Minister has given indications that there maybe changes to Capital Gains Tax coming. Rumour also has it there will be rises in VAT. Until we see the Budget Statement on the 22 June, we will not know anything for sure. However, now may be a good time to start a review of your own plans so you are ready to make a change should that be required.

The Coalition Government making its presence felt

An increase in capital gains tax (CGT) will be at the heart of any package of reforms. Currently, at a rate of 18% on "non-business assets", this is likely to increase to close to 40%.

The income tax threshold is likely to rise to £10,000 from April 2011, with plans to ditch the employee part of the proposed National Insurance increases.

The £1 million threshold on inheritance tax was always unlikely, while the Lib Dems have had to give up on their "mansion tax" on properties worth more than £2 million.

Public sector pensions are to come under scrutiny, with a commission to assess their sustainability.

Victims of the Equitable Life scandal in 2000 will benefit from a new compensation scheme that goes beyond that devised by the Labour government.

So what does the budget mean for you?

A VERY brief summary of budgetary announcements made last week, and also a reminder of those already made that will take effect from 6th April:

- income tax personal allowances remain unchanged for 2010/11

- the National Insurance Lower Earnings Limit will be increased from £95 to £97

- a reminder that for those with adjusted net income over £100,000, their personal allowance will be reduced by £1 for every £2 over the limit

- a new tax rate of 50% will be applied on those earnings over £150,000

- for dividend income, the new tax rates will be 10%, 32.5% and 42.5%

- the ISA limit will increase to £10,200 from 6th April 2010, of which a maximum of £5,100 may be invested to a cash account

- from 6th April 2011 the higher rate of tax relief on pension contributions will be restricted for those with gross income over £150,000. Anti-forestalling rules apply in the interim

- consideration is being made for removing the dafault retirement age of 65, although no changes will come into place before April 2011

- inheritance tax thresholds will remain frozen at £325,000 until the end of tax year 2014/15, scrapping previously announced increases to the threshold

- first time buyers will pay no stamp duty on properties worth less than £250,000

- stamp duty on properties over £1,000,000 will increase from 4% to 5%

- to encourage greater financial inclusion, more people are to be given access to setting up bank accounts

- legislation is being introduced to provide for larger penalties for taxpayers failing to provide a full account of their income and capital gains relating to offshore investments

- capital gains tax will remain at 18%, with the annual exemption being frozen at £10,100 for 2010/11

Income tax, capital gains tax and inheritance tax solutions

Went to a very interesting seminar yesterday regarding the use of Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) as means by which investors can save income tax, capital gains tax and inheritance tax.

Not for the faint-hearted as you're investing in new emerging companies. But, for those investors with a higher appetite for risk, they might be a solution to either reclaiming tax paid in the previous year, saving tax in the current tax year.

An added benefit with an EIS is that the assets are eligible for business property relief. Therefore, if they're held at the date of death and have been held for a minimum of two years in the previous five, although classed as within your estate, they are currently taxed at 0%. So, for those investors thinking they have to survive seven years for any IHT planning, this might be a solution?