Tax – The Facts
It seems that we have only just bid goodbye to 2004, and yet here we are in the third month of 2005, with another year end fast approaching. The year end in question, of course, is the tax year, which as you know runs from 6 April to the following 5 April.
I have often wondered why the tax year starts on such an odd day. Having looked at the Inland Revenue website I gather that the reason is primarily historical, and involves the switch from the Julian to the Gregorian calendar in the year 1752.
By the 16th century it had been calculated that the Julian calendar had lost 9 days, since its introduction in 46BC. As a consequence, most European nations changed to the new and more accurate Gregorian calendar in 1582, but we continued with the old Julian calendar until September 1752, and by that time the error had increased from 9 to 11 days.
In order to catch up the missing 11 days were simply removed from the calendar, and in 1752 the 2 September was followed by the 14 September.
Some things never change and that includes the Inland Revenue. Anxious not to lose 11 days of Revenue in that year the authorities decided to add the missing days on at the end of what had hitherto been the start of the tax year i.e. 25 March which is Lady Day, and which since the middle ages had been regarded as the beginning of the legal year. Thus, moving 11 days from the 25 March took the Revenue to the 5 April.
As we approach the end of the fiscal year it is important that allowances are used up, because for the most part they cannot be carried forward, and so I want to give a broad outline as to what those allowances are, and to suggest some other “housekeeping” matters that could be looked at at the same time.
Inheritance Tax
It is important where possible and affordable to take advantage of the very limited annual reliefs that are permitted through Inheritance Tax legislation. The annual exempt per donor for gifts is £3,000. If it is unused in one tax year, it may be carried forward, but for one tax year only. Thus, if it were unused in the last tax year then in this current tax year, £6,000 may be given. If it is unused for two years only one year can be carried forward. In addition, individual gifts of £250 may be made, but not to a person who has received a large gift.
Not exactly generous, but if you have the ability to make a payment of £3,000 per annum, then after ten years £30,000 has been given away, and with tax at 40% that is a tax saving of £12,000, which of course, can be doubled if both husband and wife make similar gifts.
Wedding gifts up to the value of £5,000 to a child may be made, up to £2,500 to a grandchild or remoter descendant, and £1,000 to others.
What is not widely understood is that if you have surplus income, and subject to certain formalities, then the surplus may be given away annually with no limit.
Transfers of any description between husband and wife are entirely free of tax, as are gifts to UK registered charities, and certain political parties.
At the moment, the first £263,000 is free of tax, and the rate of Inheritance Tax is 40%.
Capital Gains Tax
Capital Gains Tax was introduced by the then Chancellor, Jim Callaghan, in 1965. It soon became clear that certain gains were artificial in that they reflected inflation more than real growth, and so in 1982 there was a rebasing exercise. As a consequence, gains and losses on disposals of assets which were acquired before the 31 March 1982, are usually computed on the basis that these assets were acquired at their market value on that date, i.e. 31 March 1982. As always there are some exceptions to this rule.
The annual exemption for individuals in the current tax year is £8,200. A husband and wife each have a separate exemption. It is to be borne in mind that the £8,200 is of gains, not value. If you have an asset where, on disposal, there might be a large gain in excess of your allowance, consider gifting half the asset in question to your husband or wife, which can be done tax free, and bring his or her allowance into play as well. The effect, of course, is that £16,400 of gains will be free of tax. In addition, the 1998/99 tax year a new relief called Taper Relief was introduced. It replaced the old Indexation Allowance which had run from March 1982. For business assets Taper Relief is a very generous relief reducing tax to a rate of 10% after a very short period of time. It also has the effect of reducing the tax on other assets held personally, but over a lengthier time period. For older assets Indexation Allowance is calculated until the introduction of Taper Relief when it takes over.
Note that capital losses can be carried forward until they are used up.
Income Tax
Again, the key is to make sure that all allowances have been properly claimed and used where at all possible. Gift Aid donations are deductible from taxable income, and within certain limits, contributions to Inland Revenue approved pension schemes are fully deductible. Contributions into personal pensions, including most stakeholder pensions, are determined by age and net relevant earnings. In addition an individual can pay £3,600 per annum without evidence of earnings. It is never too early to invest for retirement.
Investments
There are any number of tax efficient investments available, including Enterprise Zone Investments, the Enterprise Investment Scheme and Venture Capital Trusts. Individual Savings Accounts (ISAs) remain, but Personal Equity Plans and Tax Exempt Special Savings Accounts have gone.
As with all matters relating to tax and finance it is important that proper and professional advice be taken.
Finally, why not use this opportunity to review your Will and consider an Enduring Power of Attorney.
David Endicott
February 2005
