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10 ways to beat the taxman honestly
But while few of us are wealthy enough to justify moving assets to an offshore tax haven, employing armies of accountants or using complex trust structures, there are far simpler, and perfectly legal, ways of reducing our spiralling tax bills.
Critics have argued that the politicians seem to be blurring the line between tax evasion and tax avoidance. The former involves breaking tax rules and is,van cleef lucky alhambra necklace replica, of course, illegal. The latter involves sticking to the rules but planning your finances carefully so you don't pay more tax than you have to. This could be as simple as using tax efficient savings plans such as Isas, pensions and Premium Bonds, or utilising legitimate tax reliefs efficiently. And despite the rhetoric, Nick Clegg, the Deputy Prime Minister, was forced to concede that middle class taxpayers were "perfectly entitled" to use accountants to lower their tax bills.
In fact, it could be argued that we need to be more vigilant about such measures: many families are feeling the strain on their finances thanks to increased National Insurance contributions, rising inflation, the new 50p top tax rate and the fact that many also face additional tax demands, thanks to HM Revenue Customs' computer errors.
Follow our suggestions below to make sure you keep your tax bills to the minimum.
THINK AS A FAMILY, NOT AS AN INDIVIDUAL
We all pay tax on our own individual earnings and assets. But thanks to a number of reliefs and allowances offered to married couples and civil partners, it is possible to reduce the total amount of tax you pay as a couple if you arrange your finances correctly. This, though, works only if one partner pays a lower tax rate. Frank Nash of accountants Blick Rothenberg recommended switching income producing assets, such as shares, investment funds, bank and building society accounts and jointly owned property, into the name of the partner who pays the lower rate of tax. This way, you pay less tax on dividends, rent and savings interest. "The general rule that jointly owned income is taxed 50/50 can be altered by making a specific election where there has been a genuine outright gift of assets," Mr Nash said. If you are unmarried and transferring assets, this could potentially trigger a capital gains tax (CGT) bill.
MAKE THE MOST OF 'JOINT' OWNERSHIPS
For assets likely to trigger a capital gain (such as a property or shares) it may be worth owning them jointly. Much will depend on how much annual income they generate, when you are likely to sell them and the size of the potential gain. But if a buy to let home, for example, is held in joint names, you will be able to use both spouses' CGT allowance. Gary Heynes, a partner at accountants Baker Tilly, said: "In this way up to 20,200 of capital gains can be realised before you pay tax, rather than just 10,100."
Basic rate taxpayers pay CGT at 18pc, rather than the standard 28pc rate. But couples need to be careful. When calculating CGT, the gain realised is added to the income earned in that tax year; if these two combined push you into the higher tax bracket you will pay the 28pc rate on the gain. People realising "lumpy" assets, such as a second home, are usually better off jointly owning the asset to take advantage of two CGT allowances, as in practice either partner, regardless of earnings, often pays the higher CGT rate.
CHECK YOUR TAX CODE
The problems with HMRC's computers have led to thousands of people paying the wrong tax through their tax code. Even if you are not one of the six million taxpayers receiving a letter saying tax has been over or underpaid, it's worth checking your code. Older readers should check they are getting appropriate higher personal allowances. Those over 65 can earn 9,490 before tax is charged, rising to 9,640 for those 75 and over. The standard personal allowance is 6,475.
PLAN AHEAD
There are a number of little known exemptions allowing you to reduce future inheritance tax bills. Everyone has an annual gift exemption worth 3,000,van cleef rose gold necklace replica, which removes this money from your estate regardless of how long you live. In addition, grandparents can give 2,500 to each grandchild who marries; parents can give 5,000. Wealthier taxpayers can also make regular gifts out of income,van cleef and arpels 11 motif necklace replica, which will also be IHT free. Mike Warburton of accountants Grant Thornton said: "These can be paid monthly, annually or even termly, if, for example, it was to help pay school fees. Get your relative to write a letter stating that it is their intention to make this a regular gift from their excess income. Investors can make a bigger dent in their tax bill by putting their money in an enterprise investment scheme (EIS) or venture capital trust (VCT). Both are designed to encourage private investment in smaller companies.
Mr Heynes said: "Taxpayers can put up to 500,000 in certain small companies under the EIS rules. Buying shares in a qualifying company gives a reduction in tax of 20pc,van cleef and arpels blue necklace replica, so a 10,000 investment means a 2,000 reduction in that person's tax bill." The maximum investment therefore wipes 100,000 off your tax bill. The shares are free from capital gains tax and inheritance tax.
You can invest in a wider range of shares through a VCT. This gives a tax reduction of 30pc of the amount invested, up to 200,000. A 10,000 investment would knock 3,000 off your tax bill, the maximum investment cutting your tax by 60,000. Mr Warburton said it could make sense to increase borrowing on a buy to let property and use this money to reduce the main mortgage paid on your residential home, where no tax relief is granted.
He said: "This has to be done properly. I would always recommend opening a business bank account and making sure all rental money and expenses go in and out of this account. But you can use any profits made on the rental business to reduce your own mortgage, which would be a tax efficient way of structuring your borrowing."
People can borrow only up to the original value of the property when they started letting it.
GO OFFSHORE
There is often little tax advantage in using one of the popular offshore regions such as the Channel Islands, Isle of Man, Luxembourg or Liechtenstein for those resident in Britain.
Taxpayers here are required to declare their worldwide earnings, including interest paid on overseas bank accounts. And thanks to new data sharing arrangements, HMRC can now access information on these accounts.
But some offshore bonds may still be beneficial to higher rate taxpayers, as they essentially allow people to defer tax. These are complex products and often expensive, so seek independent advice.
But while few of us are wealthy enough to justify moving assets to an offshore tax haven, employing armies of accountants or using complex trust structures, there are far simpler, and perfectly legal, ways of reducing our spiralling tax bills.
Critics have argued that the politicians seem to be blurring the line between tax evasion and tax avoidance. The former involves breaking tax rules and is,van cleef lucky alhambra necklace replica, of course, illegal. The latter involves sticking to the rules but planning your finances carefully so you don't pay more tax than you have to. This could be as simple as using tax efficient savings plans such as Isas, pensions and Premium Bonds, or utilising legitimate tax reliefs efficiently. And despite the rhetoric, Nick Clegg, the Deputy Prime Minister, was forced to concede that middle class taxpayers were "perfectly entitled" to use accountants to lower their tax bills.
In fact, it could be argued that we need to be more vigilant about such measures: many families are feeling the strain on their finances thanks to increased National Insurance contributions, rising inflation, the new 50p top tax rate and the fact that many also face additional tax demands, thanks to HM Revenue Customs' computer errors.
Follow our suggestions below to make sure you keep your tax bills to the minimum.
THINK AS A FAMILY, NOT AS AN INDIVIDUAL
We all pay tax on our own individual earnings and assets. But thanks to a number of reliefs and allowances offered to married couples and civil partners, it is possible to reduce the total amount of tax you pay as a couple if you arrange your finances correctly. This, though, works only if one partner pays a lower tax rate. Frank Nash of accountants Blick Rothenberg recommended switching income producing assets, such as shares, investment funds, bank and building society accounts and jointly owned property, into the name of the partner who pays the lower rate of tax. This way, you pay less tax on dividends, rent and savings interest. "The general rule that jointly owned income is taxed 50/50 can be altered by making a specific election where there has been a genuine outright gift of assets," Mr Nash said. If you are unmarried and transferring assets, this could potentially trigger a capital gains tax (CGT) bill.
MAKE THE MOST OF 'JOINT' OWNERSHIPS
For assets likely to trigger a capital gain (such as a property or shares) it may be worth owning them jointly. Much will depend on how much annual income they generate, when you are likely to sell them and the size of the potential gain. But if a buy to let home, for example, is held in joint names, you will be able to use both spouses' CGT allowance. Gary Heynes, a partner at accountants Baker Tilly, said: "In this way up to 20,200 of capital gains can be realised before you pay tax, rather than just 10,100."
Basic rate taxpayers pay CGT at 18pc, rather than the standard 28pc rate. But couples need to be careful. When calculating CGT, the gain realised is added to the income earned in that tax year; if these two combined push you into the higher tax bracket you will pay the 28pc rate on the gain. People realising "lumpy" assets, such as a second home, are usually better off jointly owning the asset to take advantage of two CGT allowances, as in practice either partner, regardless of earnings, often pays the higher CGT rate.
CHECK YOUR TAX CODE
The problems with HMRC's computers have led to thousands of people paying the wrong tax through their tax code. Even if you are not one of the six million taxpayers receiving a letter saying tax has been over or underpaid, it's worth checking your code. Older readers should check they are getting appropriate higher personal allowances. Those over 65 can earn 9,490 before tax is charged, rising to 9,640 for those 75 and over. The standard personal allowance is 6,475.
PLAN AHEAD
There are a number of little known exemptions allowing you to reduce future inheritance tax bills. Everyone has an annual gift exemption worth 3,000,van cleef rose gold necklace replica, which removes this money from your estate regardless of how long you live. In addition, grandparents can give 2,500 to each grandchild who marries; parents can give 5,000. Wealthier taxpayers can also make regular gifts out of income,van cleef and arpels 11 motif necklace replica, which will also be IHT free. Mike Warburton of accountants Grant Thornton said: "These can be paid monthly, annually or even termly, if, for example, it was to help pay school fees. Get your relative to write a letter stating that it is their intention to make this a regular gift from their excess income. Investors can make a bigger dent in their tax bill by putting their money in an enterprise investment scheme (EIS) or venture capital trust (VCT). Both are designed to encourage private investment in smaller companies.
Mr Heynes said: "Taxpayers can put up to 500,000 in certain small companies under the EIS rules. Buying shares in a qualifying company gives a reduction in tax of 20pc,van cleef and arpels blue necklace replica, so a 10,000 investment means a 2,000 reduction in that person's tax bill." The maximum investment therefore wipes 100,000 off your tax bill. The shares are free from capital gains tax and inheritance tax.
You can invest in a wider range of shares through a VCT. This gives a tax reduction of 30pc of the amount invested, up to 200,000. A 10,000 investment would knock 3,000 off your tax bill, the maximum investment cutting your tax by 60,000. Mr Warburton said it could make sense to increase borrowing on a buy to let property and use this money to reduce the main mortgage paid on your residential home, where no tax relief is granted.
He said: "This has to be done properly. I would always recommend opening a business bank account and making sure all rental money and expenses go in and out of this account. But you can use any profits made on the rental business to reduce your own mortgage, which would be a tax efficient way of structuring your borrowing."
People can borrow only up to the original value of the property when they started letting it.
GO OFFSHORE
There is often little tax advantage in using one of the popular offshore regions such as the Channel Islands, Isle of Man, Luxembourg or Liechtenstein for those resident in Britain.
Taxpayers here are required to declare their worldwide earnings, including interest paid on overseas bank accounts. And thanks to new data sharing arrangements, HMRC can now access information on these accounts.
But some offshore bonds may still be beneficial to higher rate taxpayers, as they essentially allow people to defer tax. These are complex products and often expensive, so seek independent advice.
The Wall