2007 Tax Housekeeping

To avoid unwanted tax liabilities, it is time to look at your tax affairs

So what sort of things should you be thinking about?

Married couples can transfer assets between each other so that any income produced is taxed on the spouse with the lower overall income. Making sure that personal allowances and lower rate bands are utilised in the best way is relatively easy if, for example, you have bank deposits or other investments. Simply gift some of the capital to your spouse so that the income accrues in their name. If you have investment properties, gift a share in the property to your spouse to ensure rental income is taxed at their lower rates. It is not acceptable to simply split the income in the most efficient way.

For those over age 65, watch that your overall income does not exceed the threshold for reduction of your age allowances. For 2006/07, if your income exceeds ?0,100, your age allowance will reduce by ? for every ? of income over that limit. So transfer some investments to your spouse to keep your income under the limit.

If you have sold assets during the year, it is worth calculating the gain now to see whether you are within the annual exemption. If not, are there any assets you can sell at a loss to offset the gain? Sales to spouses are not counted ?they are deemed to be made for no gain/no loss!

Can you delay any disposal until after 5 April 2007? A short delay before selling can extend the tax payment date by a full twelve months. And you may gain another year’s worth of taper relief.

These tips have barely touched on the many areas that need to be considered. Managing your tax affairs involves much more than filling in a tax return each year.

Selling your main home

When you sell your main home, hopefully for a healthy profit, you will not pay any tax on the profit, provided the property has been your main residence throughout the period you have owned it.

But, does this mean that you don’t have to declare the sale in a tax return? In many cases, you don’t have to declare the sale, but, there are times when you do.

If the property has been your main residence throughout the period of ownership and the land with the property does not exceed 1.25 acres, you will not pay tax on the disposal and you do not need to declare the disposal on your tax return.

However, if the land with the property exceeds 1.25 acres, then the automatic exemption will not apply and you will need to declare the disposal on a tax return. The profit may still be tax free despite the fact that the garden or grounds exceeds the “permitted area?of 1.25 acres, but the extent of the further exemption will depend on whether the additional land is required for the reasonable enjoyment of the property, taking into account its size and character. The Tax Inspector will decide whether your entire garden is covered by the exemption, or whether part of the profit you have made is taxable.

This is why it is essential to consider the tax implications before you sell your home. Cripps Tax Management can help you plan ahead and advise you whether the sale is likely to give rise to a tax liability and what this may be.

The Finance Act 2006 made sweeping changes to the new inheritance tax treatment of trusts

The new rules seek to tax most trusts in the same way as discretionary trusts were treated under the old rules. Inheritance tax may be payable when setting up a trust, every ten years during the lifetime of the trust and when assets leave the trust.

Discretionary trusts are unaffected, and in particular nil rate band discretionary trusts (a traditional feature of tax planning) need no revision.

Accumulation and Maintenance trusts, which include both traditional family settlements and gifts in Wills to children at age 21 or 25, are potentially affected. Family settlements can be amended to avoid additional inheritance tax if action is taken before 6 April 2008.

Any trusts now created in a lifetime will be caught by the new rules.

Life interest trusts in wills will continue to be taxed under the old rules, unless they do not come into effect on the death of the testator. There is a small window of opportunity where a life interest trust existing on 22 March 2006 ends before 6 April 2008, and is replaced by another life interest trust.

Gift and loan trusts and discounted gift trusts where the amount of the gift is less than the nil rate band are still effective for tax planning.

We would be happy to help you review your wills and trusts to let you know if anything needs to be changed.

Pre-owned assets tax (POAT) ?deadline for election

As from 5 April 2005, POAT catches people who have given away assets but continued to derive a benefit from them. The reason for the introduction of POAT was primarily to catch certain types of inheritance tax (IHT) avoidance plans which successfully avoided the gift with reservation of benefit rules (GWROB). But it also affects a number of other situations where the possibility of IHT planning was never considered. The POAT charge is an annual income tax charge based on the deemed rental value of assets which you no longer own and are outside your estate for IHT but you continue to receive a benefit from these.

One possible way of avoiding the POAT charge is to make an election. The effect of this is to opt out of the POAT regime and bring whatever gift you originally made back into the GWROB rules. This puts an end to any IHT saving. If you made the gift at any time before 5 April 2006, the deadline for making the election is 31 January 2007.

Making an election does have a number of possibly serious consequences. Before taking this course of action, you should seek legal advice advice.