Page last updated at 00:05 GMT, Wednesday, 5 November 2008

A silver lining for the credit crunch?

Money Talk
By Ronnie Ludwig
Saffery Champness, Chartered Accountants

Ronnie Ludwig
Ronnie Ludwig

We are all feeling the pinch of the tightened economic conditions with falling values and falling, or non existent, profits.

However, there is a silver lining as, provided any losses are carefully managed, the tax system can work to your advantage and significant savings can be made.

This is particularly true in the areas of inheritance tax and income tax.

Somewhat counter-intuitively, this could also be a good time to put any spare cash into your pension fund.

Minimise your inheritance tax liability

If you are looking to give to future generations, now might be the perfect time to give tax efficiently.

This is because plummeting share values and declining property prices mean that the value of your estate could be at its lowest point for some time, and therefore the tax "cost" of lifetime gifting maybe be minimal, or even nil.


Falling asset values work in your favour


There are two key ways to minimise inheritance tax (IHT) on your gifts: exempt transfers - gifts with a value of less than 3,000 per annum, and potentially exempt transfers (PETs).

So, if the value of, say an investment, has now dipped below 3,000, you will be able to give this away now with no IHT due, assuming no other gifts have been made in the current tax year.

In addition, if you didn't use your 3,000 last year this may be carried forward for a maximum of 12 months, so 6,000 could be gifted now, free from IHT. This figure is doubled for married couples.

PETs are gifts made during a tax year that are above the 3,000 annual allowance but which still fall within the IHT nil rate band, currently 312,000.

A PET is exempt from IHT provided it is made more than seven years prior to the death of the donor.

With prices falling, a second home or a share portfolio that would not have satisfied the conditions to be a PET previously, may well do so now.

Whilst such transfers can be IHT free, capital gains tax (CGT) will be levied in the tax year that you make the gift.

Here again, falling asset values work in your favour. This is because CGT is calculated by subtracting the acquisition cost of the asset from its value at the time that it is gifted.

There is also a 9,600 annual CGT exemption. Because many asset values have fallen, there may now be no CGT to pay upon gifting.

Manage losses on buy-to-let properties efficiently

With current economic conditions and mortgage rates tightening, a number of buy-to-let landlords have found themselves with no tenants but have retained the usual maintenance costs, insurances, etc - so they are making a loss.

Comedian Leonard Rossiter
Even the most curmudgeonly landlord may find some opportunities.

From a tax perspective, this loss can either be offset against other property income in the same year, or carried forward indefinitely to be relieved against future property income.

This offers some immediate relief, or at the very least a light at the end of the tunnel.

For those who own "qualifying furnished holiday lettings", such as property that is let for short periods of time to tenants coming for a holiday, the news is even better.

If you have made a loss on a furnished holiday let, it can be offset against all types of your other income and not just future profits from property income alone.

So, if you earn income by, say, renting out a holiday cottage, any loss on the letting activity could be offset against your income from other sources, resulting in a lower overall income tax bill.

In a rising market, it is all too easy to forget about tax reliefs, but they have now become vital.

So even if the property you are letting out is still generating profit, ensure that you claim all available reliefs and deductions.

Letting agents fees, advertising, maintenance costs (but not improvement costs) and, in certain cases, mortgage interest payments, are all examples of expenses that can be offset.

Similarly, if you are self employed or running a furnished holiday letting business and you are using a room at home as an office, it should be possible to claim a tax deduction for some of the house running expenses such as heat, light, business use of telephone, painting and decorating, etc.

Put more into your pension

If you have cash in the bank, now may be a good time to think about putting it into your pension scheme.


It is possible to make the downturn much less painful financially


This is because of the generous tax reliefs available on pension contributions.

The maximum contribution which can be made in the current tax year is 235,000, a figure which most people cannot aspire to.

However much smaller contributions can be very tax efficient because the government grosses up personal contributions, meaning a higher rate tax payer and his pension fund can get a 50% boost on contributions.

In practical terms, for every 100 contributed by a higher rate tax payer, the government grosses this up to 125.

The pension fund reclaims 20% of this grossed up figure by the way of a tax relief, and you claim a further 20%, giving a total overall tax relief of 50 on a 100 cash contribution.

Invest in shares?

Much has been made over recent months over the adverse effects of falling share prices on pensions.

Many experts say shares are now at an undervalue, and so it could be a good time to acquire them via your pension fund.

Even if the market falls further, you will have enjoyed a huge tax relief on your contributions, meaning the market would have to fall a very long way before you make a loss in real terms.

The economic cycle has clearly shifted into a dramatic downturn, and so a different planning approach is called for.

But by knowing where you can take advantage of the situation, it is possible to make the downturn much less painful financially, and in some cases, it may even be possible to take advantage of it.

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.



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