Tax year-end planning
Following the awfulness that is self-assessment we now turn our thoughts and attentions to the tax year-end of 5th April.
Now that HMRC has clearly indicated that aggressive tax planning will be the subject of equally aggressive tax compliance challenge, if we are to optimise clients’ tax mitigation we shall in future have to ensure that we fully utilise the current tax saving schemes promoted by the Government.
Ensure as far as is practicable that family incomes are equalised as regards husband and wife to make maximum use of the personal allowance and lower rate tax bands. Look at the distribution of income producing assets in relation to earned income and if appropriate move assets from one spouse to another free of capital gains tax. Look at dividend distributions.
Ensure that where possible the tax free annual capital gains tax allowance of both spouses is utilised to realise exempt capital gains and increase the tax base cost of share portfolios.
Carry out an inheritance tax review to seek and exploit lifetime gifts, annual exemptions and the transfer of surplus income to maximise the tax free movement of capital. Do not forget gifts in consideration of marriage.
Pay the maximum allowance into low tax ISAs.
Maximise pension contributions eligible for income tax relief.
Review investment and savings portfolios for balance following market movements during the year.
Autumn Budget Statement commentary
The Autumn Statement was focused on encouraging business growth through investment in the face of an economy expected to shrink by 0.1%.
The annual investment allowance for plant and machinery will increase from £25,000 to £250,000 for two years, applying to purchases on or after 1 January 2013.
However, of more concern to clients of this practice is likely to be the capping of unlimited income tax reliefs for losses to the greater of £50,000 or 25% of an individual’s income.
The affected reliefs are: trade loss relief against general income; early trade loss relief; post-cessation trade relief; property loss relief against general income; post-cessation property relief; employment loss relief; former employees deduction for liabilities; share loss relief; losses on deeply discounted securities; and qualifying loan interest.
The annual allowance is to be cut from £50,000 to £40,000 from 6th April 2014.
The lifetime pension relief allowance will fall from £1.5 million to £1.25 million from 6th April 2014.
From 5th April 2013, the basic income tax threshold is to be raised to £9,440.
The threshold for the 40% tax rate is to rise to £41,450 from 6th April 2013, £41,865 from 6th April 2014 and to £42,285 from 6th April 2015.
The maximum income limit for capped drawdown is to revert to 120% from the current 100%.
The inheritance tax threshold is to be increased to £329,000 from 6th April 2015.
The contribution limit for individual savings accounts from 5th April 2013 will increase to £11,520.
The basic state pension will increase from 6th April 2013 to £110.15 a week.
The increase in fuel duty scheduled for January 2013 has been cancelled.
The Annual Investment Allowance will be increased from £25,000 to £250,000 per annum for a two-year period commencing from 1st January 2013.
From 6th April 2014 the main rate of corporation tax will fall to 21%.
The Fiscal Cliff
The fiscal cliff is a term that represents the tax rises and spending cuts that are scheduled in the USA next year. The cliff represents government revenue increases. Higher income tax rates will rise from 35% to 39.6% and the top capital gains tax rate will go from 15% to 23.8%. The estate tax rate will rise from 35% to 55%. All other tax rates are to rise by 3% except for those in the lowest income-tax bracket. The Budget control spending cuts include a 30% cut in fees that Medicare pays physicians.
Monetary policy flexibility is already having a meaningful impact on the economy and has managed to drive interest rates down to record low levels. This has contributed to a revival in both the automotive and housing markets. Automotive loan rates are at record low levels and competition is producing interest-free loans on some models for up to five years. A combination of loan availability, competitive financing and pent up demand has underpinned the fledgling economic recovery.
Low interest rates are boosting the housing market, housing starts have been on a steady upward trend since early 2011 and are now at their highest level since late 2008 and house prices have been trending up over the past year.
Private sector borrowing collapsed from around 15% of GDP before the recession to a current rate of about 4%. There is scope for a rebound that is already evident. Lenders have been rebuilding and conserving capital. Lending terms and conditions were initially tightened materially and some lenders have still to loosen conditions, but terms for both corporate and household borrowers have been eased for lower risk, secured loans. There has been a rise in credit card borrowings although corporate borrowing has been slower to recover.
The outcome of the presidential election will bring greater clarity over the economic environment and will influence the corporate sector’s relationship with government. The uncertainties will be resolved and corporate America will be better able to plan the future. From historically low total levels of borrowing in the economy it seems likely that private sector borrowing will offset at least some of the contraction in public sector debt.The anticipated crisis may well be a much more benign event.