The Press and Journal (Aberdeen and Aberdeenshire)
Don’t take eye off the ball on matters of tax
Planning does not have to be Messi, says personal finance expert at Banchory’s Granite Financial Planning
Business Editor: Erikka Askeland (01224) 343356 E-mail: pj.business@ajl.co.uk Inverness Office: Tel: (01463) 272200 To Advertise: Tel: (01224) 343159 The news that Barcelona footballer Lionel Messi has been convicted of tax fraud and sentenced to 21 months in jail highlights the pitfalls of trying to avoid paying tax.
While he is unlikely to spend time behind bars, instead serving his time on probation, it is clear that countries worldwide are taking a harder line on tax avoidance.
Most of us do not enjoy footballer salaries and lifestyles but still want to know what legitimate tax planning can be undertaken.
If you are married or in a civil partnership, make sure you both use your personal allowances.
The personal income tax allowance for 2016-17 is £11,000.
Income producing assets can be transferred, which allows you and your partner to use both allowances fully and avoid paying tax unnecessarily.
Assets can also be transferred between spouses/civil partners without penalty from a capital gains tax (CGT) perspective and this means that both CGT allowances of £11,100 for 2016-17 would be available in the event of a subsequent sale. You can invest up to £40,000 into a pension for the 2016-17 tax year.
You can also carry forward unused relief from the previous three years but you need to have sufficient earnings to support the payments.
A payment of £40,000 would effectively cost £24,000 for a higher rate taxpayer who enjoys 40% tax relief.
Pensions also enjoy inheritance tax protection and it is possible to pass on funds to beneficiaries tax free if you die before 75.
High earners need to be aware that tax relief may be restricted for those earning in excess of £150,000 so it is essential advice is taken. The Isa limit is currently £15,240 but is due to increase to £20,000 from 2017-18 onwards.
Isas allow tax-efficient growth and a shelter from CGT, while enjoying a wide range of investment opportunities ranging from cash, investment funds to Alternative Investment market shares. Up to £200,000 can be invested in VCTs, with income tax relief at 30% available. Dividends received are tax free and there will be no CGT on sale provided they are held for a qualifying period of at least five years. Income tax relief of 30% on investments up to £1million is available, provided they are held for a minimum of three years.
There is also the potential for 100% relief on inheritance tax, which is available after holding the investment for two years and provided shares are still held at time of death. Capital gains can be deferred and eliminated entirely if EI scheme shares are held at death.
VCTs and EI scheme investments are higher risk investments and should only form a small part of a well-diversified portfolio for those willing and able to accept the higher level of risk they represent.