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From April 2010 if you earn over £150,000 you will be facing an increased income tax of 50% on your earnings. If you haven’t thought of becoming more tax efficient before, then now is your opportunity. There are many ways to use your personal tax allowance which could see you becoming more efficient.

In the UK each individual has a personal tax allowance of £6,475 each tax year. This means that any returns on investments, sale of assets or income is free of tax until you go over the threshold. It is important to remember that your partner will have the same personal tax allowance as will your children and it is important that it is all used.

There are also some other options open to you if you wish to become more tax efficient:

When investing in stocks, it would be wise to adopt the buy and hold strategy as the longer you hold on to a stock, the less tax your profits will be subjected to. If you hold the stock short term, usually less than a year, you will be taxed at the highest rate. However, if you hold on to your stock long term, you will only be taxed at the lowest rate of capital gains tax which is 18%.

An Individual Savings Account or ISA can be used to save cash or to invest in stocks and shares. The account has an annual allowance which currently stands at £7,200 and will rise to £10,200 from April 2010. You do not pay any tax on profits or dividends from an ISA, including income tax and capital gains tax even if your other investments exceed the CGT threshold. If you have money saved from a previous tax year you can transfer some or all of the money from a cash ISA to a stocks and shares ISA without this affecting your annual ISA investment allowance.

More experienced investors may want to consider Venture Capital Trusts (VCTs). They offer tax relief of up to 30% on all of your investments, with a limit of £200,000, which could potentially save you as much as £60,000 in tax if you hold the investment for five years. All dividends are tax free and the profits are free of capital gains tax. However, VCTs are higher risk long term investments, meaning that they are not usually suitable for everyone.

Inheritance Tax is paid on somebody’s estate when they die and is also on the gifts and trusts made during that person’s lifetime.  Typically, it is the executor or personal representative’s responsibility to pay inheritance tax using funds from the deceased’s estate.

Usually inheritance tax is only due if the deceased’s estate is worth £325,000 or more, or £650,000 for married couples or those in civil partnerships. The estate includes houses, possessions, money and investments.

Sometimes, even if the state exceeds the threshold, assets are still eligible to be passed on without having to pay inheritance tax. These exemptions include:
• Any gifts you make to a UK registered charity will be exempt from Inheritance Tax.
• If you survive for seven years after making a gift to someone, the gift is exempt from Inheritance Tax, no matter what the value.
• You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount.
• You can make small gifts of up to £250 to as many individuals as you like tax free.

If you transfer your UK pension into a QROPS scheme based in another jurisdiction and plan to retire abroad permanently, then the benefits open to you will help you live your retirement years in luxury.

For your pension payments to become more tax efficient, or free of tax, it is more beneficial to transfer your pension into a QROPS scheme in a neutral location, for example Guernsey.

If you choose to transfer your pension into a QROPS fund in another country then you will have to weigh up all the political and currency risks that will affect the value of your pension in the future.

A SIPP is a personal pension plan which is suited to the more sophisticated pension investor. There are very few restrictions on what you are available to invest your funds in, meaning that you will have complete control over your own funds. With a SIPPS plan you are able to invest in property funds in the UK and overseas. All assets within a SIPPS fund benefit from inheritance tax (IHT) mitigation.

If you would like any further information on becoming more tax efficient whether you live in the UK or abroad, please contact us.

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