Solicitor Lorna Sansom, in our leading Probate, Tax & Trusts team, discusses tax planning schemes.
There has been a huge amount of publicity in the past couple of years surrounding the issue of tax avoidance, particularly where celebrities and the super-rich are involved.
However, for an individual with moderate wealth, a combination of income and sustainable capital withdrawals can produce a healthy annual ‘income’ of up to £100,000 with an effective income tax rate of less than 2%... and all without resorting to any elaborate tax-planning schemes. It’s all down to making sure you have the right spread of assets in a variety of ‘tax wrappers’ and clever utilisation of all your available allowances.
So, what do we mean by ‘tax wrappers’? These would be various investments, each with its own distinct tax treatment, such as pensions, ISAs, offshore investment bonds and portfolios of unit trusts or OEICs. Your financial adviser will tell you that a spread of investments across these wrappers gives flexibility to cope with changing personal circumstances and a shifting tax climate. Further planning opportunities are afforded to couples who can allocate their assets strategically to maximise the allowances that are available to each of them.
The following tax allowances are available for 2016/17:
- £11,000 income tax personal allowance
- £5,000 dividend tax allowance
- £1,000 savings tax allowance (basic rate taxpayers)/£500 savings tax allowance (higher rate taxpayers)
- £11,100 capital gains tax allowance
- £15,240 ISA contribution allowance
- £40,000 annual pension contribution allowance
The newly retired person might be tempted to dip into his pension pot to meet his immediate financial needs. However, if he has a good spread of assets, his IFA would probably advise caution. Only 25% of the pension pot is tax free and the rest, no matter how it is taken, will be taxable at his marginal rate. Moreover, the inheritance tax planning opportunities afforded by pensions, following recent changes to the death benefit rules, mean that raiding the pension pot whilst other sources of funds are available could be a bad idea.
Sensible advance planning can mean a low-tax retirement for many. There are already a considerable number of £1m ISA portfolios in the UK, which goes to show that you can do pretty well by squirreling away your annual ISA allowance each year. Withdrawals from ISAs are, of course, tax free.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
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