Tidying up your tax affairs

MONEY TALK
By Leonie Kerswill
Tax partner at PricewaterhouseCoopers

With the end of the tax year a few days away, there is still time to take advantage of any tax breaks available.

Leonie Kerswill of PwC

It is also a good idea to spend time considering whether your finances are in shape for the new tax year.

So what should you think about doing in the next few days?

Capital gains tax

Taking capital gains tax first, have you used up your annual exemption of £8,800 for this tax year?

If not, are there any assets you own that are showing a gain - maybe some shares that you've owned for a number of years?

If there are, but you want to keep hold of them, you could get an uplift in their base cost by using a so-called "bed and spouse" transaction.

This is where you sell the shares on the open market and the next day your spouse, or civil law partner, buys them back.

Maybe it is your spouse or civil law partner who has the asset and you have the unused annual exemption.

In this case, your spouse could transfer the asset to you and you could make the sale and realise the gain.

Given how close we are to the end of the tax year, if you have an asset - particularly a shareholding - that is standing at a significant gain, then if you and your spouse/civil partner both have unused annual exemptions, you could transfer the shares into joint names before you sell them and use both allowances.

If the gain is greater than £17,600, you might want to split the sale between this tax year and the next - which means that you could realise £36,000 of capital gains tax-free.

Inheritance tax

Remember that each individual has a tax free allowance of £3,000 for each tax year.

This means that you can give away £3,000 without it being subject to inheritance tax if you die.

If you don't use it, then it can be carried forward, but only for one tax year.

After that, it is lost.

In addition, you can make small gifts of up to £250 to any one individual in any one tax year.

If these limits aren't enough, you might want to think about whether you want to commit to making regular gifts to someone.

If so, then provided these are made out of income and your usual standard of living isn't reduced, the gifts will be exempt from inheritance tax.

To qualify for the exemption, the gifts have to be regular. One of the easiest ways to demonstrate this is to set up a standing order, either annually or more frequently.

Pensions

We're now nearly one year on from A-Day, so if you haven't already done so, now is the time to give some thought to your pension contributions.

The maximum contribution on which you can get tax relief is either your total taxable earnings or £215,000, whichever is the lower.

Remember that everyone has a lifetime allowance, which is £1.5m for this tax year (gradually increasing to £1.8m for the tax year 2010/11).

For those in a final salary or defined benefits scheme, the value of the fund is calculated by multiplying the pension entitlement by 20, so someone retiring with a final salary pension of £80,000 has a pension fund of £1.6m.

It is important that you consider whether your fund is likely to breach the lifetime allowance, as any excess funds will be liable to a tax charge of 55%.

If you think you may be in this position, it may be possible to apply to HM Revenue and Customs for protection against this penalty.

But this application needs to be made by April 2009.

Individual Savings Accounts (ISAs)

Have you maximised your ISA contributions this year?

Each individual over 18 years old can invest £7,000 into an ISA and pay no tax on income and capital gains.

The minimum investment age for cash ISAs, however, is only 16, so this might be a way to invest tax efficiently for a child.

The maximum subscription for a cash ISA is £3,000, which is also the same amount as the inheritance tax exemption.

A prosperous new year!

With the old tax year out of the way, the time is right to take stock and review whether you are in the right starting place for the new year.

As a starting point, if you or your spouse/civil law partner aren't working - or pay tax at a lower rate - you could consider transferring investments to make sure that between you, you make full use of personal allowances and lower rate bands.

Why not consider paying into an ISA at the beginning of the tax year rather than the end, so that you can benefit from an additional 12 months' investment.

Wills

And finally, your will.

Do you have one and if so, do you review it regularly?

One relatively straightforward way to reduce the family's inheritance tax liability is to make sure that your will contains a clause, often known as a discretionary nil rate band clause.

This works to make sure that after the first death in a couple - of a husband, wife or civil law partner - the inheritance tax nil rate band is not wasted.

Given that next year, the nil rate band increases to £300,000, this means a possible tax saving of £120,000 - which is definitely worth having.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.