This year promises to be an interesting one for the world of taxation, we have already had one Budget this year and another is set for 22 June. With the potential for change on the horizon, this is how things currently stand:

The first Budget in March 2010 contained few surprises and the anticipated disappointments for individual taxpayers.  The biggest news was the increase in the lifetime allowance for entrepreneur’s relief (ER) from £1 million to £2 million.  This increases considerably the value of ER and makes planning to take advantage of the relief much more worthwhile: the maximum lifetime value of ER was £80,000 per individual but for a married couple owning a business worth, say, £5 million, the relief can be worth £320,000 in tax which makes the costs of reorganising shareholdings to take advantage of the relief much more acceptable.  Detailed advice should always be taken before any action is taken to avoid jeopardising relief already ‘accrued’, to ensure all conditions are satisfied and no liabilities are triggered unnecessarily or unwittingly.  The new government has indicated that while there may be increases in the rates of capital gains tax, some form of relief for business owners will be available.  Speculation is rife as to what form that may take and who it will be available to.

The expected income tax increases from 6 April 2010 were confirmed, i.e. the introduction of the 50% tax rate on income above £150,000 and the phasing out of the personal allowance for those with income over £100,000 until no personal allowance is available where total income is above £112,950.  It is almost certain that these tax increases will remain, at least in the short term.  Baker Tilly has been actively advising clients on how to mitigate the impact of the tax increases: there is no magic or ‘one size fits all’ solution.  There are schemes on the market which purport to reduce income or convert income to capital gains but most of these will be subject to close scrutiny by HM Revenue & Customs (HMRC) and are likely to have a short shelf life with the increase in CGT rates expected to be announced on 22 June.

However, there are plenty of less contentious actions individuals can take to minimise their tax liability.  To give just a few examples:

• Married couples and those in civil partnerships should review their income generating assets for tax efficient ownership (without forgetting non tax issues), putting more income into the hands of the lower income spouse.
• Shareholdings of family businesses should be reviewed to ensure dividend distributions are directed tax efficiently.  Careful planning is needed, of course, due to the potential application of the settlement rules and there is no guarantee that anti-income shifting rules, delayed for now, will not be introduced in the future in one guise or another.  This can also have advantages for the purposes of ER, as mentioned above.
• Consider using trusts: properly set up, trusts can pass income to other family members provided the settlor is excluded from benefit.  There are, of course, costs associated with the set up and running of a trust.
• Partnerships should be looking at the use of limited companies within their structure.  Introducing a corporate partner could facilitate reducing the tax rate on profits which are to be reinvested into the business.
• If an unincorporated business has significant chargeable assets for CGT purposes, it may be worthwhile selling it to a company and paying tax of between 10% (if ER applies) and 18% at current rates.  The sale proceeds can be retained in the company as a loan (paying interest which, while taxable on the individual, is not liable for National Insurance) and the loan then drawn down in lieu of salary or dividends which would have attracted the top rate of tax.
• Advantage should be taken of the gap between the 50% rate of tax on income and the current 18% rate on capital gains by investing in capital appreciating, rather than income producing assets.  Even if CGT rates increase to 40%, there may still be a tax saving here, particularly if regular use is made of the CGT annual exemption.
• Insurance policies or offshore bonds which pay out after 10 years could be considered: tax rates may be lower by the time the policy is surrendered or bond encashed, or at least a tax deferral will have been achieved.  It is usually possible with such products to withdraw up to 5% per annum tax free.
• The March Budget also increased the limit for Individual Savings Account (ISAs) from £7,200 to £10,200 per person so it is worth utilising the ISA allowance each year as the income is tax free.  Income on certain National Savings products is also tax free.
• Other investments such as the Enterprise Investment Scheme or Venture Capital Trusts provide income tax relief for contributions within limits.  It should be noted that these can be risky investments and Baker Tilly is not authorised to give investment advice.
• While the rules on pension contributions have become horrendously complex, there are still opportunities for higher rate tax relief on pension contributions made in 2010/11, even for high earners.  Every situation will be different dependent upon the individual’s pattern of past contributions, levels of income etc, but at least £20,000 can be contributed in 2010/11 and gain tax relief at up to 50%.
• Donations to charity under the Gift Aid Scheme will also attract income tax relief at up to 50% and can have the advantage of reducing taxable income to just below the key points of £150,000 or £100,000.
• Non UK residence is perhaps a more drastic solution as it is becoming increasingly difficult to cease to be UK resident where business, family and social ties remain in the UK.  It is also a major upheaval but may be a solution for some.
  
  As ever, detailed tax and investment advice should be sought before any action is taken.  There may also be further significant changes in the Budget on 22 June, so watch this space!  For more information, please contact Karen Clark in the London Office or your usual Baker Tilly contact.