EACH week The Scotsman gives you a top ten guide to pertinent financial issues.
This week, Carl Bayley, author of several plain English tax guides including How to Save Tax 2008/2009 and How to Avoid Property Tax, gives us his top ten recommendations on saving tax when the economy takes a downturn.
1 LOOK OUT FOR TAX-SAVING OPPORTUNITIES Saving on tax is more important than ever when the economy is struggling. The taxman is our constant companion from womb to tomb and when times are good, he does not hesitate to collect his share of the spoils, so we need to look out for what he can contribute when times are hard. Even the simplest measures will help, like utilising your annual tax-free Isa allowance of £7,200.
2 CLAIM WHAT'S DUE Around £1.5 billion is overpaid in tax in the UK each year. The overpayments arise for a number of reasons, including apathy and failure to understand an increasingly complex tax system. Higher-rate taxpayers need to make sure they have claimed deductions such as personal pension contributions or gift aid payments.
Those on lower incomes, such as non-earning spouses or partners, need to reclaim any tax deducted at source, such as on bank interest. It is currently still possible to reclaim overpaid tax as far back as 2002-3. But hurry – the government is proposing drastically to shorten this deadline soon.
3 MAKE YOUR LOSSES PAY A sale of a loss-making investment will yield a capital loss which can be set against any capital gains in the same tax year or in the future. However, capital losses cannot be carried back. To get relief against capital gains arising this year, you need to dispose of your loss-making investments by 5 April at the latest.
4 DON'T WASTE YOUR LOSSES Any capital gains you do have up to the amount of the annual exemption (£9,600 for the current tax year) will be exempt anyway. However, if your total capital gains for the year don't exceed this amount then any capital losses you make this year may effectively go to waste. In this situation, it may actually be better to delay the disposal of any loss-making investments until after 5 April next year.
5 SAVE ON SAVINGS In many couples, one spouse or partner is a higher-rate taxpayer while the other has a much lower level of income. Despite this, most couples still tend to hold their savings jointly. As a result, half of their savings income is being taxed at 40 per cent. By moving all of your savings into the name of the lower-earning spouse or partner, you can cut the tax on your interest income or maybe even avoid it altogether.
6 TAX-FREE INVESTMENTS Married couples and civil partners can transfer assets and investments between each other tax free and a basic-rate taxpayer receives most dividends tax free. Transferring any quoted share investments into the name of a basic-rate taxpayer spouse or civil partner will avoid income tax at an effective rate of 25 per cent.
7 PRE-SALE TRANSFERS When the time comes to sell an investment, it will often make sense for married couples or civil partners to make a pre-sale transfer into joint names so that two annual capital gains tax exemptions are available. Using both exemptions will save up to £1,728 but it's important to be sure that the transferee gets genuine beneficial title before the ultimate sale.
8 GAIN FROM RENTAL LOSSES Many property investors have accumulated significant amounts in rental losses and yet still face substantial capital gains tax bills on the sale of their investments. If they simply sell up and dispose of their whole portfolio, the rental losses will just go to waste, so it may be better to look at ways of utilising rental losses, such as by selling the portfolio gradually over a number of years.
The accumulated rental losses brought forward can be used to ensure that future rental income is received tax free.
Spreading out property sales also has the advantage of benefiting from several years' annual capital gains tax exemptions.
To get relief for current and future rental losses, consider changing to furnished holiday lettings or making future investments through a company.
9 CLAIM BUSINESS MILEAGE If you travel on business in your own car and your employer does not reimburse you at the HM Revenue and Customs approved rate of 40p per mile for the first 10,000 miles or 25p per mile thereafter, you can claim a tax deduction for the difference. The same applies where you use a company car but pay for the fuel personally and are not reimbursed at the approved rates (currently between 7p and 21p per mile depending on fuel type and engine size).
10 GIVE BACK PRIVATE MILEAGE If your employer provides all your fuel, you may want to think about reimbursing them for your private mileage. The tax cost of private fuel provided by an employer is up to £2,016, often far greater than the actual cost.
The full article contains 865 words and appears in The Scotsman newspaper.
