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How to become more tax efficient - Samantha Tanner, Wealth & Living Magazine

How to become more tax efficient

As political uncertainty currently looms in the UK and the country’s top earners have been forced to pay 50% tax on their earnings, many are wondering what they can do to relinquish some of their tax burden. Truth is, you will still have to pay tax on your income, but there are ways that you could end up paying less by way of tax efficient vehicles and schemes.

Each tax year every individual within the UK has a personal allowance on tax that allows them to gain a certain amount through taxable income, for example through investments, without having to pay tax on it. As the new tax year has just started, this would be a great opportunity to plan how you can become more tax efficient, especially if you have been affected by the new tax rates.

The personal allowance for 2010/11 is £6,475 and it is important to remember that your spouse and your children will have exactly the same allowance as you, meaning that they will also need to make use of their allowance.

There are a number of ways to invest in a tax efficient manner. Portfolio bonds are the most obvious example. A portfolio bond is a simple holding structure for a wide range of investments such as stocks, shares, bonds and funds. It provides a flexible solution for investments and usually offers greater tax efficiency. If you are expatriated and have a portfolio bond based in certain offshore jurisdictions, they can become 100% free of local taxes.

An Individual Savings Account or ISA can be used to save cash or to invest in stocks and shares. The account has an annual allowance which currently stands at £10,200 which came into force this tax year 2010/11. You do not pay any tax on profits or dividends from an ISA, including income tax and capital gains tax, even if your other investments exceed the capital gains tax threshold. If you have money saved from a previous tax year, you can transfer some or all of the money from a cash ISA to a stocks and shares ISA without this affecting your annual ISA investment allowance.

More experienced investors may want to consider Venture Capital Trusts (VCTs). They offer tax relief of up to 30% on all of your investments, with a limit of £200,000. This could potentially save you as much as £60,000 in tax if you were to hold the investment for at least five years. All dividends are tax free and the profits are free of capital gains tax. However, VCTs are higher risk long term investments, meaning that they are not usually suitable for the less experienced investors, or those who wish to start investing.

Inheritance Tax (IHT) is paid on somebody’s estate when they die, but is also paid on the gifts and trusts made during that person’s lifetime. Usually, inheritance tax is only due if the deceased’s estate is worth £325,000 or more, or £650,000 for married couples or those in civil partnerships. However, there are some exceptions including: You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount, if you survive for seven years after making a gift to someone, the gift is exempt from Inheritance Tax, no matter what the value.

If you are planning a retirement abroad, this decision could be very beneficial to you in terms of tax efficiency on your pension. For example, if you transfer your UK pension into a QROPS (Qualifying Recognised Overseas Pension Scheme) scheme based in another jurisdiction and plan to retire abroad permanently, then the benefits open to you will help you live your retirement years in luxury.

The major advantages of transferring your pension into a QROPS include: Your pension income will become more tax efficient or even become free of tax, you will have a much greater investment freedom with the flexibility of investing in a much wider range of funds and investments and all unused pension funds can be left to your beneficiaries upon your death.

If you plan to retire in the UK, then you will need to start thinking about your pension as early as you can. One of the most tax efficient pension schemes for you to invest in would be SIPPs. A SIPP is a personal pension plan which is suited to the more sophisticated pension investor. There are very few restrictions on what you are available to invest your funds in, meaning that you will have complete control over your own investments. With a SIPPS plan you are able to invest in property funds in the UK and overseas. All assets within a SIPPS fund benefit from inheritance tax mitigation.

If you are planning to become more tax efficient and have no idea where to start, then it is important that you get in touch with an experienced financial adviser who can guide you through the processes.

Samantha Tanner

Samantha Tanner is the editor of Wealth & Living Magazine which provides wealthy individuals and expats advice on relocation and the latest luxury must-haves.

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