Make sure the tax year has a happy ending

THE end of the 2009-10 tax year is particularly difficult to plan for. Income tax rates will increase on 6 April and, with inflation hitting 3.5 per cent in January, there is continuing uncertainty over the impact of political and economic factors on the tax outlook in this election year. Timing of income and gains, exemptions and deductions, and tax-favoured savings are, therefore, all areas to be considered in a pre-year end planning review.

Those with income above 150,000 will attract a top tax rate of 50 per cent from 2010-11. Where income exceeds 100,000, personal allowances will be lost, which increases tax due to a marginal rate of 60 per cent. It may be tempting for those affected to take steps to speed up receipt of income before 5 April. This needs to be balanced against the accelerated payment date for tax, which could be due a full month earlier than would otherwise have been the case.

There is much speculation that capital gains tax will rise from its current rate of 18 per cent. This is not certain but steps can be taken to crystallise gains in the current year to take advantage of the 18 per cent rate. While this may protect against increases, it also means the tax has to be funded for payment on 31 January, 2011. Full advantage could also be taken of the annual exemption of 10,100 available to each partner in a marriage.

Coupled with the fact that transfers between spouses do not attract a capital gains tax charge, it is possible to give assets pregnant with gain to a spouse who can then sell them, effectively doubling up the exemption. With a new exemption available on 6 April, by timing the sale of assets and splitting ownership it is possible for a couple to quickly exempt as much as 40,400.

However, even if no sales are planned, a related technique can be used to uplift the base cost of assets, thereby reducing exposure to CGT.

Using quoted stocks and shares as an example, the current owner sells on the market sufficient shares to generate a 10,100 gain. The spouse then buys the same stock back on the same or next day. This minimises exposure to price movements, retains ownership in the family and makes sure the base cost is uplifted by the amount of the annual exemption, which would have gone unused. A similar result can be had by using contributions to an Isa to buy shares from a personal investment portfolio.

Many people have experienced big falls in their share portfolios over 2009 and, despite limited recovery, some holdings may still show losses. If gains have exceeded the annual exemption, it may be worth realising these losses to offset the CGT bill. If the worst has happened and shares have become valueless, a loss can be crystallised by making a negligible value claim.

This applies to assets other than shares too, although losses on shares are the most common claims. An asset is of negligible value if its worth is less than 5 per cent of what was paid for it. If the shares were subscribed for rather than purchased from a previous holder, it is possible to set the loss against income. Timing is important – it may be better to delay claiming such a loss into the new tax year to offset against income taxed at a higher rate than the current year.

Inheritance tax is another area where an annual exemption is available to immediately exempt outright gifts. The exemption is 3,000 per donor but, if it is not used, it can be carried forward for one tax year only and used in the following tax year.

This exemption can be used to good effect if coupled with other tax-efficient savings. For example, every child born after 31 August, 2002, is entitled to a child trust fund which grows tax-free. Family and friends can contribute 1,200 a year to this fund (the year is dictated by the child's birthday). Another use is to contribute to a child or grandchild's stakeholder pension fund. A non-earner can contribute 2,880 per annum to a stakeholder pension, which equates to 3,600 in the fund, as tax relief of 20 per cent is added.

Stakeholder pension contributions can be made for non-earning spouses as well, although the annual 3,000 IHT exemption is not needed as transfers between spouses are usually exempt anyway.

When it comes to deductions, pension contributions should also be reviewed before the tax year ends. Due to very complex new rules, special care is needed if income exceeded 130,000 in any of the last two tax years or this year, or pension contributions gross exceeded 20,000 (or the average of irregular contributions over the last three tax years up to 30,000). While higher-rate tax relief may be due on contributions if any of these limits apply, the result may be that an offsetting tax charge is also created.

For anyone with a furnished property abroad, let for holiday use, there is a one-off opportunity in 2009-10 to treat the let as a trade, meaning any loss suffered as a result of expenses exceeding rental can be offset against income.

Another deduction to consider is gift aid donations. If tax rates are likely to increase, it could be worth delaying payment until 6 April or later to obtain the higher rate of tax relief.

Coupled with tax-efficient investments such as contributions into Isas, EIS (Enterprise Investment Schemes) and VCT (Venture Capital Trusts), there is a lot of opportunity to plan tax bills before that 5April deadline.

Valerie Smart is director at PricewaterhouseCoopers, Edinburgh