How to avoid the 50% income tax rate

Picking up on the hot topic of the moment, avoiding tax, here are some ways to reduce your tax bill from Towry Law.

And with the income tax rise for higher earners coming in April, time is running out for those who want to start restructuring their portfolios as alot of these measures will take time to implement.

How to avoid the 50% income tax rate

• Take withdrawals subject to capital gains from investments rather than income that will be subject to the high income tax rate
Many investors still look to draw income from their investments rather than considering drawing capital – and or profits – as an alternative. Whilst there may be a mindset change required, the tax benefits are obvious, especially for those subject to the 40 or 50% income tax rates. Investors also rarely make use of their nil rate band Capital Gains Tax allowances which can again be a very advantageous way of drawing tax free capital from an investment portfolio. There is much speculation surrounding the potential rise in CGT rates in the PBR next week, and investors should also be mindful of potentially crystallizing gains at the current low rates.

• Restructure trust assets so they are charged to capital gains tax rather than income tax. Income generated within a Trust will be subject to a 50% income tax rate from next April. Trustees should therefore reappraise whether their current investment portfolios should be restructured with this in mind. Many modern trusts allow capital to be distributed – as well as income – and therefore the old system, which allows the income requirement to drive the makeup of the investment portfolio, can now look dated and inefficient.

• Cash in investment bonds
These types of investments are effectively taxed in accordance with income at the source, When they are encashed or surrendered they are potentially liable to further income tax for those paying higher rates. While legislation currently allows for 5% of the original capital invested to be taken each year without immediate tax charge, a tax liability could still simply be building for the future. It is now the ideal time to reassess these holdings as it may well be sensible to surrender them prior to the end of the tax year or, in the very least, have an exit strategy in mind.

• Ensure ISA allowance is fully utilised, including additional allowance for over 50s. Recent statistics indicate that the over 50s have not missed a trick here with a large number of the over 50s having already topped up their existing ISAs with the additional £3,000 allowance.

• Make use of tax-free National Savings products
Investors still do not pay enough attention to the benefits of using National Savings. For those with large cash holdings Premium Bonds should always be considered. While slightly dull, they do allow a couple to take £60,000 out of their taxable income which can then assist in overall tax efficiency. Investors who believe that inflation will ultimately return, and who perhaps experienced the inflationary period of the 1970′s, should bulk up on the Index-Linked National Savings Certificates. We favour a rolling programme whereby both the 3yr and the 5yr certificates are utilised in tandem. Couples that have used their full allocation over the last few years could find themselves benefiting from a large pool of capital that is inflation proofed and tax free. As the certificates mature investors have the opportunity to roll over (retaining tax free status) or to cash-in the proceeds tax free and spend.

• Make pension contributions that will benefit from higher rate tax relief
Pension contributions still make sense mathematically but now unfortunately at far lower level then they have in the past. Those considering this option should ensure that they maximise contributions so as to gain the 40% while they still can.

• Consider tax efficient investments such as VCTs and EISs
For those that understand sophisticated investments then both EIS and VCT should be considered as a potential source of higher rate income tax relief. As always though, before committing to these forms of investment, the buyer still needs to make sure that they understand the exact terms and risks of the investment. For the correct investor these can be of use, however they should not be considered for those that cannot commit to locking up capital for the long term.

• Consider splitting income between spouses
Many investors still hold all of their assets in one partner’s name and do not make best use of both personal allowances. With the ways in which one can reduce income tax now sparse, every little helps.

• Speak to your accountant or tax adviser
See if there is anything that you can do to either accelerate bonuses or dividends due to you so that they can be paid before the end of the tax year.

Source: The email came from from Chris Cole, senior wealth adviser at Towry Law

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