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Contact us | www.future-financial.co.uk | E-mail your comments | Archive | |
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Turn losses to advantage News that those earning in excess of £150,000 a year will soon face a tax rate of 42.5% on dividend income highlights the beneficial tax treatment of pensions.
It also reminds us that there are times to crystallise investment losses. Anti-forestalling regulations put in place to prevent ‘very high earners’ from piling in massive amounts of money in advance of the introduction next April of a 50% tax rate on their earnings and the 20% limit to tax relief they can receive on pension contributions means that they are limited in how much they can invest in this way. For those with incomes below £150,000, however, the contribution limit for this year is their entire earnings (while an employer can top this up to the annual allowance of £245,000 this year £255,000 next). How does this help? Many self-invested personal pensions (SIPPs) will accept what are called in specie contributions. These are contributions made not in cash, but in the form of shares (or some other property) already owned by the investor. Of course, once investments are held within a SIPP, there is no UK income tax (other than the unavoidable 10% tax withheld on dividends from UK companies). Similarly, there is no capital gains tax. So by moving shares (up to the permissible limit) into your SIPP, you can protect these against future tax. What is more if you earn, say, £80,000 a year and make an in specie contribution of shares worth £40,000 into your SIPP, the taxman adds tax relief of £10,000 as contributions are net of 20% basic rate tax relief. And as a higher rate taxpayer, you will also be entitled to a further 20% in additional tax relief. So your tax bill will be slashed by a further £10,000 for the year. Will I have to pay CGT? If the value of the assets you move into your SIPP is higher than the amount you paid for them, then they are potentially liable to capital gains tax (CGT) at the new rate of 18%. However, because there is an annual allowance on realised gains of £10,100 before the tax cuts in, your investments would have needed to have performed well for this to make a significant difference on the figures discussed. What if my investments are showing a loss? On the other hand, many investments purchased within the last few years could be showing a loss at the moment. By carefully balancing the investments moved into the SIPP, it would be possible to offset these losses against any gains and therefore have no CGT to pay at all. The point is that any future gains are fully protected against the tax. The importance of advice Of course, the rules relating to pensions mean that you can subsequently only get back 25% of the total fund as tax free cash the balance of the fund must be used to provide some form of retirement income, which will itself be subject to tax. But by then you may be in a lower tax bracket altogether so the impact will be less severe. Key Points: > Dividends are liable to tax for higher rate payers > Falling markets reduce taxable gains > Pensions shelter against income and capital taxes |
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©futurefinancial This publication represents our understanding of law and Inland Revenue practice as at the date of publication. It does not provide individual tailored investment advice and is for guidance only. Rules may vary for Scotland and Northern Ireland. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of land and buildings is generally a matter of a valuer’s opinion rather than fact. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Your home may be repossessed if you do not keep up repayments on your mortgage. Loans are subject to status and written details are available on request. Always seek independent advice from a qualified financial adviser. Think carefully before securing other debts against your home. Fees for mortgage advice maybe charged and for details of these please contact us. The Financial Services Authority does not regulate all the activities undertaken by the company, including taxation advice and overseas mortgages. |
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