Taxing times for year end planning
This year April 5 falls on a Sunday, so it is now time to take decisions on pensions, ISAs or capital losses
As another tax year draws to a close on April 5 you have your final opportunity to take a number of steps which can save you some tax. Today I will outline a couple of them. You need to act quickly though, and I suggest this week rather than next.
Firstly a correction of a typing mistake in last week’s article about pensions. I was talking about how people aged 50 plus (retired or not) fortunate enough still to be paying 40% tax can invest in a pension and immediately start drawing the benefits.
For them £600 net invested becomes £1,000 in the fund once all tax relief has been obtained. However those over 50 (soon to be 55) can immediately take out 25% tax-free and buy an annuity with the rest. The final cost to them is £600 less £250 = £350. This is different from what appeared last week. So the individual ends up out of pocket £350 yet getting a pension bought with a £750 fund. This is a pretty good deal.
That’s the correction out of the way, but I would remind you that to save tax for 2008/09 by way of a pension contribution the payment has to be made by April 5, 2009 — which is a Sunday. Don’t leave it to the last minute. Those with a private pension who will be 49 by April 5, 2009 have just one year left to decide whether to draw their pension at 50. After April 5, 2010 the minimum age to draw a pension rises to 55.
Let’s take the example of Jenny who will be 50 in June 2009. She has no intention of stopping work, but she must decide whether to start taking her pension. Anytime up to April 5, 2010 she can decide to start her pension straight away. However if she does nothing, then her pension age will move to 55. So she will be unable to access her pension until June 2014 — her 55th birthday.
Capital losses are more common these days than capital gains. Fewer people are selling properties at a massive profit than a couple of years ago. On the other hand some people are sitting on losses — whether paper losses or actual ones. By a paper loss I mean something is currently valued at less than you paid for it.
The loss is not a real loss until you sell the thing. On the other hand an actual loss occurs when you sell something for less than you paid for it.
In straitened financial times some people have to sell investment properties or holiday homes for less than they cost. Or they may be considering selling shares at a loss, in case they drop further, or simply because they need the money. Capital losses are not all bad. If you made a gain this tax year then a capital loss this year would reduce your capital gains tax bill. So consider turning that paper loss into a real one.
Selling loss-making shares will save you tax on the gain. Then, after waiting 31 days, you can, if you wish, buy the shares again.
This means the shares now sit at the lower cost in your hands but so long as you don’t sell a fortune’s worth in one year you need never pay capital gains tax (CGT) on their later sale. The cost of obtaining a loss like this will just be your share dealing costs and stamp duty. If you hope the shares will rise again you can buy them back, and so will have buying costs as well. The tax to be saved is 18% CGT. So if you made a gain where you will have a tax bill then the loss could be helpful. For every £1,000 of loss the tax to be saved is £180, less share dealing costs.
A final point about capital losses for people who did not make a gain this year. A capital loss which is made by selling shares or property can be carried forward until the year it is needed to reduce your CGT. There is no limit to how long the loss can be carried.
ISAs are tax-free savings where the amount you can invest is limited. This tax year you can invest up to £7,200 in a combination of shares and cash. The cash element is restricted to £3,600.
If you are nervous about shares then the cash ISA offers you virtually risk-free savings, hopefully at a reasonable rate of interest. If you have not invested the maximum this year then you could top up your savings by April 5, 2009.
With interest rates so low the thought of avoiding the 20% tax (or 40% for higher earners) is especially attractive. Do shop around though — a local bank advertised last week that if your cash ISA had less than £15,000 in it they would pay you just 0.5%.
Since it takes years of ISA savings to reach £15,000 this means most people should go elsewhere, where rates as high as 3% are available.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.hustontax.com or 028 9080 6080