Taxation
Taxing Questions
Most of us risk being over taxed on our income, capital gains and the value of our estate when we die. It is worth getting a clear grasp of how these taxes work and then discussing with your financial adviser the most tax efficient financial planning for you.
Income Tax
As the old adage goes, there are two things in life that are certain. One is death. The other is taxes. Both individuals and corporate bodies have a whole range of taxes to pay on their earnings, investments and capital however; there are several allowances and legal planning strategies to save money of many of these and mitigate the impact of taxation. One of the biggest taxes paid by individuals which nets the treasury over £6 billion pounds in the last tax year alone is inheritance tax (death duty) yet, this tax has for many years been referred to tax experts as a “voluntary" tax. However, many estates have continued to pay this tax at a rate of 40% after the individual allowances.
The single person's income tax allowance for the year to 5th April 2007 is £5,035 (2005/2006 - £4,895). If your total income is less than this during the tax year then there's no tax to pay.
Non Taxpayers should pay no tax on any interest earned on savings. If you are a non-taxpayer your bank or building society can provide you with Inland Revenue form R85 to apply for your interest to be paid to you without deduction of tax.
Capital Gains Tax (CGT)
In the tax year to 5th April 2007 the CGT allowance is £8,800 (2005/2006 £8,500).
This means that you do not have to pay tax on gains from buying and selling shares or other investments (excluding one’s primary residence) during the tax year up to that amount. Indexation allowance can also be applied to reduce CGT further. It is however important to be fully up to date with the Government’s recently introduced rules on pre-owned assets.
Inheritance Tax (IHT)
Inheritance tax is hanging over more and more of us each year. This is largely due to substantial the rise in residential property values. The IHT allowance for the 2006/2007 tax year is £285,000 (2005/2006 £275,000).
Depending on the value of your house and other assets this may not be sufficient to avoid IHT being due on your death. If you die leaving an estate worth more than £285,000 (2005/2006 £275,000) and you have no spouse, or Civil Partner, your estate will pay IHT at 40% on the balance.
The inheritance tax threshold is to be raised to £300,000 for the 2007/2008 tax year, to £312,000 for the 2008/2009 tax year and £325,000 in the following year.
Even if you do have a spouse who will inherit from you this may only defer the time when tax will be payable because when he or she dies, the same tax will become payable.
Our advisers can discuss permitted allowances and options for mitigation with you as part of our estate planning strategies. One thing though that is for sure with all forms of tax - if you do nothing the government will use its considerable powers to make sure a share of your hard earned wealth ends up in their coffers!
Reference to Inland Revenue allowances and rates are based on current rules which may change in the future.
Legal disclaimer
These pages provide generic information about various aspects of financial services advice that we provide as well as possible areas of clients’ financial planning needs. We hope they are helpful to you but they do not, on their own, add up to proper investment advice and we cannot take responsibility for anything you do in reliance on them without further discussion with us. Please do not make a decision based upon the information contained within these pages alone. They are not detailed or comprehensive enough to enable you to make an informed decision which is tailored to your circumstances and needs. Please contact us now for tailored advice.