How to survive these taxing times

Philip Salter
Follow Philip
AS THE dreaded 31 January rolls around for the self-employed – in fact, 1 February this year following planned industrial action – tax is once again top of the agenda. Nick Clegg, the deputy Prime Minister, has upped the ante by calling for the personal allowance to be raised to £10,000. In these taxing times, with HMRC increasingly blurring the lines between tax evasion and avoidance, it is worth looking at ways to legally reduce the amount siphoned off by those that think they know how to spend your money better than you do.

According to Adrian Lowcock of Bestinvest, Isas “should be the first port of call for savers and investors looking to protect their money from the taxman.” He says that to make them more tax efficient, investors should place income-generating assets such as corporate bond funds under the umbrella.

When it comes to pensions, Lowcock believes Sipps are the cheapest, most flexible option. He says, depending on how the contribution is made and how much an investor earns, the marginal rate of relief could be as much as 61 per cent. He says: “At retirement you can get 25 per cent of the pension back as a tax free lump sum and take a taxable income from the rest.”

Teresa Fritz, consumer finance expert at MoneyVista suggests: “If you are part of a couple and one of you is a higher rate taxpayer, spread any savings and investments efficiently.” She asks: “Why pay higher rate tax on investments or savings if switching assets to your partner means a lower tax bill – or even no tax bill if your partner is a non-taxpayer?”

A note of caution though – if the worst happens and the marriage hits the rocks, the higher earner might regret this (although in reality they will likely be taken to the cleaners either way).

Another tax mitigation plan that relies on trust is the Junior Isa. It is limited to £3,600 per year, but this could become a hefty sum by the age of 18. Enough, perhaps, for a university education, or six months of excess, depending upon what your child decides (you will have no control over it). “Bare trusts, which provide the beneficiary with entitlement to the assets when they reach 18, are attractive from a tax efficiency point of view,” says Chris Wozniak of Collins Stewart. He says that as long the person making a contribution to the trust survives for seven years after making a gift, this is exempt from inheritance tax. If you really don’t trust your child, an alternative could be to take out a stakeholder pension for your child, which they won’t be able to access until retirement.

Leonie Kerswill, a partner at PwC, notes: “Everyone can make £10,600 of gains this tax year before they need to pay tax, but if you don’t use the exemption you lose it – there’s no carry forward.” As such, she suggests that if you want to hold the asset longer term then you could sell it and your spouse/partner could buy it back: “This way you keep it but you’ve washed out some of the gains.

Robin Vos, partner in the private client practice at Macfarlanes suggests holding investments through an offshore insurance bond in order to defer tax on investment income and gains: “5 per cent of the amount put into the insurance bond can be withdrawn tax free every year for up to 20 years.”