Seven ages for tax savings

From childhood to retirement, it's worth planning finances to take full advantage of all the breaks, says Walter Sinclair

EXACT steps to tax-saving depend in part on your stage in life. Here we consider just a few points appropriate for the "seven ages of tax planning".

CHILDHOOD

Each of your children has a complete set of annual allowances, tax rates and capital gains tax exemption. Try to arrange for these to be used.

Older children may have holiday or other earnings to use up their income tax relief and lower-rate bands. However, if there are appropriate family trusts, these could make income distributions for the benefit of children before the year end. This enables tax to be reclaimed for them.

For example, suppose your father had set up an accumulation and maintenance settlement for your 10-year-old son who has no other income. The trust pays £6,500 (net of £3,500 tax before 6 April 1995) for his maintenance and education. Income tax is then recoverable for 1994-95 as follows:

Gross income payment (£6,500+£3,500) £10,000

Personal allowance £3,445 Sub-total £6,555 Tax at 20% on £3,000 £600.00 Tax at 25% on £3,555 £888.75 Sub-total £1,488.75 Tax deducted from distribution £3,500.00 Income tax repayable £2,011.25

STUDENT DAYS

As in the childhood phase, students are more likely to be at the receiving end of major tax planning arrangements. However, as they get older and pass the age of majority (18), there will generally be fewer legal restrictions and they will be able to take a more active part.

If you are a student and hold any shares, you should consider taking any profits before 6 April 1995 within your annual capital gains tax exemption (£5,800).

Discretionary trusts are useful for targeting income to students who can reclaim all or part of the 35 per cent tax. In fact, if there are several young beneficiaries, as each moves through student stage, trust income can be allocated to him or her. But take care that this does not result in the loss of educational grants.

EARLY WORKING LIFE

Once you start work, a whole new world of tax saving opens up. Areas benefiting from year-end planning include pensions and company cars.

Your personal pension contributions must be paid by 5 April 1995 for relief in 1994-95 (unless you elect by 5 July 1995 to carry them back to 1993-94). If you are in an occupational scheme, contributions are geared to your company's year-end.

You have until 5 April 1995 to get your annual company car mileage up to 2,500 or 18,600, to gain a one-third or two-thirds discount on your benefit charge.

NEWLY MARRIED

Throughout your marriage from its early days, the rules for independent taxation provide valuable tax-saving opportunities, generally geared to the tax year-end. In essence, your respective incomes and capital gains are normally made more equal. This helps you both to use your income tax allowances, rate bands and capital gains tax annual exemptions.

For example, suppose that for 1994-95 Jack's income puts him well into the 40 per cent tax band and he has £15,000 of capital gains. His wife, Jill, has no income nor capital gains. If Jack had arranged that, say £14,445 of his income and £5,800 of his capital gains had gone to Jill, the tax savings would have been as follows:

Reduction in Jack's tax bill Income tax at 40% on £14,445 £5,778 Capital gains tax

on £5,800 £2,320 Sub-total £8,098 Less increase in Jill's tax bill Income tax at 20% on £3,000 £600 Income tax at 25% on £8,000 £2,000

(£3,445 is covered by personal relief)

Capital gains of £5,800 covered by the annual exemption nil

Sub total £2,600

Net tax saving £5,498

How do you transfer income and gains? So far as investments are concerned, you will need to act before the year-end for best results, or even the year before. However, if you have a family company, shares could be transfered to the spouse with the lower income and dividends paid.

If you are in business on your own account, an effective way of giving your spouse income would be to take him or her into partnership. Alternatively, employ your spouse in your business and pay a suitable salary.

PARENTHOOD

The patter of little feet signals important tax-planning opportunities, involving several generations. You and your spouse, parents, and perhaps grandparents, may wish to make tax-saving arrangements benefiting the child. For example, before 6 April 1995, you could each make gifts out of your annual £3,000 inheritance tax exemptions, together with any unused exemptions from 1993-94.

Gifts might be invested for the child. However, where you make gifts to your own child and they produce more than £100 of annual income, you will be taxed on this. So choose non-taxable investments like Savings Bonds.

A useful way to fund future school fees is to buy Personal Equity Plans, in view of their freedom from income tax and capital gains tax. You and your spouse can both invest up to £9,000 each tax year and so review your positions as 5 April approaches.

MIDDLE AGE

As you advance into middle age, your outgoings will probably reduce - especially if you have children and they complete their education. As a result, you may well have more funds available for making gifts, and perhaps creating settlements for your children and grandchildren.

If you have a large income, one way of reducing your tax bill is through buying Enterprise Investment Scheme shares. Your EIS investment produces 20 per cent income tax relief and "holds over" post-28 November 1994 capital gains on other assets. You can invest up to £100,000 for 1994-95 in EIS shares.

RETIREMENT

As you reach retirement, include your will in your tax year- end review. For one thing, you will be able to take account of the latest Budget and Finance Bill provisions. An example is the inheritance tax nil-rate band going up from £150,000 to £154,000 after 5 April 1995.

Married couples often make wills leaving the bulk of their assets to the surviving spouse. On the first death, there is normally no inheritance tax to pay, but the benefit of the nil-rate band is lost, so that much more is payable on the second death. If you can afford to, you should each leave at least part or all of the nil-rate band to your children or others. With the present inheritance tax rate of 40 per cent, and using the full £154,000 nil-rate band, this would save £61,600 on the second death.

q Walter Sinclair is an accountant and author of the J.Rothschild Assurance Tax Guide (formerly Hambros Tax Guide). His new book, How to Cut Your Tax Bill, which expands on the seven ages of tax planning, is published by Orion at £20 and available from 6 April.