25 top Tax planning ideas
We are here to ensure that you have made the best use of reliefs and allowances available, hence a there are a variety of tax reliefs and planning ideas currently available for Entrepreneurs/Businesses and Individuals. Here are our Top 25 tax planning ideas in summary format. Should you need to discuss in detail or require advice on any of our tax planning idea, please do not hesitate to contact us.
Entrepreneurs, businesses and companies
1. Profit and cash extraction
With the top rate of income tax currently at 45% for some types of income, it is important to think about the most tax efficient way of extracting profits from a limited company. For the director/shareholder there are several ways of doing this including taking dividends instead of salary, company contributions to a pension and receiving tax efficient benefits. For example if the timing of dividends can be controlled then they should be taken in the following tax year to ensure tax liabilities that arise are paid a year later proving tax cash flow advantages. Even for un incorporated businesses, timing of profits and business expenses can be altered to achieve maximum tax cash flow advantages.
2. Capital Allowances
Capital allowances can be claimed on a wide range of qualifying capital assets including plant and machinery, fixtures and fittings (known as integral features) and cars. A variety of allowances are currently available some of which give an immediate reduction in taxable profits of 100% of the allowable expenditure. Capital allowance claims should be maximised where possible claiming all available allowances and thinking carefully about the timing of expenditure. Professional advice should be sought to maximise the capital allowance position, particularly in the case of property sales, purchases, refurbishments and new developments. If need to know if you qualify for 100% first year allowances and therefore reducing you trading profits in turn by 100%, then please contact us and we would be more than happy to help.
3. Business Property Relief (BPR)
BPR is one of the most valuable tax reliefs available, potentially removing the full value of a business, be it that of a sole trader, partnership or shares in a private company from the charge to inheritance tax, either on lifetime gifts or death. A number of conditions must be met in order to qualify for BPR and we can advise you on this and also support to you with what further steps need to be taken to rectify the situation before the IHT event.
4. Entrepreneurs’ Relief
Entrepreneurs’ relief can offer significant tax savings to individuals and certain trustees when selling shares or the whole or part of a business. Where a claim is made, gains on qualifying business assets suffer a very low effective tax rate of only 10%. Certain conditions must be met to ensure that this relief can be applied and we can always review your case to see if you qualify and if also advice you on appropriate steps to ensure that you qualify in the future.
5. Research & Development Claims
Broadly speaking, your company or organisation can claim an additional 125% on qualifying R&D costs if it undertook an R&D project that seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty. The definition of research and development is much wider than many people think. You could therefore be eligible for enhanced tax deduction and not realise it and therefore it is worthwhile contacting us to see if you qualify.
6. Patent Box
Are you a company that is holding a Patent! If so then you must read on. The new Patent Box regime came into effect on 1 April 2013, it presents companies that are holding patents and using them in their business with the opportunity to significantly reduce their tax burden. Under the new regime profits from qualifying patent interests will be taxed at rates as low as 10% delivering cash tax and effective tax rate benefits. Companies should take action now to understand how to benefit from the regime and what business changes might be advantageous.
7. Contributing to a pension
Pension contributions are tax efficient for both employers and employees/directors. Company contributions to an employee‘s pension will attract corporation tax relief and will be free of income tax and national insurance for the employee (up to certain limits). Individuals can claim relief from income tax and national insurance for contributions to personal pension schemes (again, subject to certain limits).
Pension contributions can be made via number of ways to obtain tax relief such as via Small Self-Administered Pension Schemes (SSAS), Self Invested Personal Pensions (SIPP). Auto-enrolment has pushed employers to provide a pension for their employees but a business owner may want more flexibility in the way they save for their own retirement.
Directors and owners of small businesses should think about what's best for them and their company when picking a pension. While the merits of a SIPP are well-known, small owners could find the specific benefits of a SSAS enable them to save and boost their business. We can provide tax advice on pension contributions to your specific needs.
8. Family tax planning
Structuring of a family owned business in a commercial yet tax efficient way can maximise the tax reliefs available. Tax should also be an important consideration in succession planning. If you are thinking of selling your business to key management or passing it to the next generation of family members then care needs to be taken to ensure the tax planning is done in the right way and any pitfalls are avoided.
9. Incentivising your staff
Clearly, the retention of key staff is of critical consideration for businesses of any size. With cash flows being restricted in these difficult times, consideration can usually be given to granting share options to employees. Certain tax-approved options schemes such as Enterprise Management Incentives (EMI) are potentially very tax-efficient and a good incentive for key workers. The EMI is a share scheme designed to help small, ambitious companies retain the right talent to grow. By rewarding staff you’re looking to recruit or retain with tax advantaged share options, you offer employees a reason to work for you. If you need more information on EMI, then please feel free to contact us.
10. Raising finance
There are many ways to raise finance for your business of which one of them is via the Enterprise Investment Scheme (EIS) which is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. Subject to specific conditions being met, individuals are able to obtain income tax and capital gains tax reliefs on investments in newly issued shares in unquoted companies.
While EIS has been around going on two decades, its success has led to the government’s more recent introduction of the Seed Enterprise Investment Scheme (SEIS), which specifically targets companies in their first two years looking to raise that first £150,000 in funding. Should you need to raise finance or need to learn more about EIS or SEIS, with the application of tax advantages to you, please contact us.
11. Choice of Investment Vehicle
For a new or growing business the choice of investment vehicle (limited company, LLP, partnership, sole trader) is important from a commercial and tax perspective. As the business changes and grows the choice of investment vehicle should be reviewed, as what suits the business at one particular stage may not necessarily be appropriate for the life of the business. We can provide advice on incorporating your business if to a Limited company status and review your tax position on this thereof.
12. Loss relief
If you have losses arising from business interests or investments should undertake a review to ensure that such losses are claimed in the most efficient way. For example, then can be carried back to offset against prior year profits, resulting in a tax refund if tax was paid in the prior year, carried forward to offset against future profits or even relived sideways against your other income subject to certain conditions being met. Please contact us for further information.
13. Tax Credits
A protective claim for tax credits should be considered, particularly for self-employed individuals with fluctuating profits. This is even more evident given the current economic climate. Claims for tax credits can only be backdated by one month and need to be made on an annual basis. Please contact us so we can advice if you qualify for tax credits.
14. Income shifting
Married couples should consider transferring income generating assets to their spouse in order to fully utilise their respective tax free personal allowances. This exercise is also effective where one party pays income tax at the higher rate/additional rate and the other is a non taxpayer/basic rate taxpayer. Married couples should review the ownership of income producing assets such as portfolio investments, rental property, bank accounts or private company shares and seek advice on how ownership can be varied so income can be shared to best post tax effect.
15. Additional rate of income tax
Personal pension contributions and gift aid donations can reduce the amount of income tax high earners pay at the additional rate of 45%. If you are tax payer at the additional rate of tax at 45%, please contact us so we can discuss ways of reducing your income tax burden.
16. Personal allowance
Individuals with a statutory total income in excess of £100,000 could look to make personal pension contributions in order to preserve their personal allowance. Salary sacrifices in exchange for tax efficient company benefits are also effective for these purposes and should be considered as part of your tax planning strategy.
17. Exempt transfers for inheritance tax (IHT) purposes
With the nil rate band having been frozen in recent years, gifting during lifetime has become increasingly important. The typical exempt transfers for IHT purposes include (1) the annual transfer of £3,000, (2) small gifts of up to £250, (3) gifts in consideration of marriage and (4) normal expenditure out of income. For further formation on IHT planning, please contact us.
18. Tax efficient investments
Investors can reduce their annual income tax bills by making investments through Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes. Capital gains tax deferral relief/exemption may also apply. Please do contact us so we can advise further.
19. Main residence election
Where two or more properties are occupied concurrently as a home, the taxpayer should ‘elect’ which property is to be treated as the main residence in order to mitigate any potential capital gains tax charge in the future. If you require further help on this, please contact us.
20. Jointly owned property for married couples
An election on ‘Form 17’ can be a useful tax planning tool. Such a declaration enables a married couple to be assessed on the income arising from jointly held property in accordance with their actual beneficial interest, as opposed to having the income taxed upon them equally.
21. Deeds of Variation
Such a variation to a deceased’s estate could be an important tool to both the estate itself and beneficiaries for inheritance tax purposes. These should however not be relied upon and should be considered as a reserve as opposed to a substitute for appropriate tax planning. There is a two year time limit for varying a deceased’s estate.
22. Capital gains/losses
Transfers of chargeable assets between married couples are exempt from capital gains tax (CGT). Taxpayers sitting on a potential capital gain should consider transferring the asset in question to their spouse, where the spouse has unrelieved capital losses brought forward or where capital losses can be crystallised. Transferring assets into joint names can also ensure that both spouses’ respective annual CGT exemptions are fully utilised on a future disposal.
23. Inheritance Tax planning (IHT)
IHT planning can significantly reduce the value of assets passed to the next generation. It is never too early to make an IHT plan and individuals are caught out far too often because IHT planning is not considered early enough. Taking early action and having a plan for the distribution of assets or maximising the generous reliefs, could mean that IHT is mitigated and the next generation can benefit from the full value of the estate passed over. Generally, those who are retired with wealth in excess of the nil rate band (or double nil rate band for couples) should put in place a plan to deal with IHT. Should you require further help on this, then please contact us.
24. UK tax residence
The statutory residence test came into force with effect from 6 April 2013. Without a thorough understanding of what the test means, there is a danger that some of the rules can be easily misinterpreted or over looked. This can have devastating results if an individual who thinks they are non-UK tax resident turns out at the end of the year to have been UK resident, and is therefore potentially taxable on their worldwide income. Those who are in any way uncertain of their residence status under the new rules should not wait until the end of the tax year before seeking advice. Also, individuals should not simply rely on being in the UK for fewer than 90 days a year. In some cases, spending as few as 16 days in the UK can lead to a UK tax resident status.
25. Gift Aid Donations
Gift Aid remains a valuable tax relief, on unlimited amounts donated to qualifying charities at the donor’s marginal rate of tax. For those who make charitable donations, it is of benefit, both individually and the charity, to ensure that tax relief is maximised. This may mean the donor making contributions to a holding account or charitable trust in years when their tax rate is high. Even an election can be made to carry back donations to the previous year, if the carry back rules are met so that relief can be made to minimise tax exposure.
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