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Save some money, ask an accountant

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Thursday September 8, 2011 at 6:46pm

It is always frustrating when a client tells me of a financial transaction they have just completed without thinking to consider the tax implications first. In many ways it is not unreasonable for clients to assume that the transaction they are undertaking is straightforward and nothing can be done to improve it. However, there are a surprising number of ways to reduce tax that most people would know nothing about. Here are some examples:

  1. Mitigate stamp duty* on property purchases
    It is legally possible to completely avoid paying stamp duty on residential and commercial property transactions by changing the way the property purchase is structured. Our strategies start at residential property purchases over £600,000 and commercial property transactions over £1.5M. However you must implement the planning before exchange of contracts, hence the need to speak to an accountant first. 
  2. Reduce your effective tax rate to 20%
    By using a third party employer to contract your commercial services to your company you can reduce your overall rate of tax deduction to 20% rather than well over 50% for a higher rate tax payer. Our planning is suitable for those with salary or dividend income in excess of around £70,000 per annum.
  3. Make a claim for Research & Development Tax Credits
    If your company enters into research and development you may be eligible to claim tax credits against corporation tax. Many dismiss this lucrative exemption as not applying to them however it is well worth considering.

    For example if your company develops software this may well be an area eligible. We have several clients who have successfully used a specialist firm to make the claims on their behalf with fees paid only on successful reclaim of tax. Such an arrangement completely eliminates the risk of failure.

    If you have expenditure in excess of £50,000 in this area (including staff costs) it is well worth investigating further.   

  4. Claim all capital allowances
    Another specialist area is claims for capital allowances. On large development projects it is not uncommon for expenditure to be categorised as capital improvements or building costs without consideration as to whether any capital allowances (which are allowances against tax for capital items) could have been claimed. If you think you may be eligible then claims can be made retrospectively so you may well have expenditure on which you are still eligible to make a claim.
  5. Remunerate yourself tax efficiently using dividend
    The obvious planning point here is to consider taking dividend rather than salary. However for those with high earnings or retained reserves within the company that they wish to withdraw there are better ways still of withdrawing funds. Make sure you get the right advice, at the right time.
  6. Remunerate yourself using pension
    The company can make a pension contribution of £50,000 per annum with the option to carry back over 3 years. This can mean making a total contribution of £150,000 assuming no pension contributions have been made by that individual in the prior two years.

    Using the new flexible drawdown pension rules it is possible to withdraw as much pension as you like from your pension fund without limit once you have achieved the minimum secure income of £20,000 per annum.

    The company receives full tax relief on the contribution, the pension fund grows tax free and 25% can be taken tax free by the individual after the age of 55. The balance can be withdrawn at a time to suit, possibly when the individual concerned has moved from a higher rate tax payer to a basic rate tax payer.

  7. Consider pension fund loans to reduce tax or improve working capital
    If you need money to buy an asset in your company and the banks won’t lend then consider taking a loan from your pension in order to make the purchase. There are strict HMRC rules on pension fund loan backs like the maximum loan is 50% of the pension fund assets and your pension fund must charge your company a market rate of interest. As with all of these ideas you should take advice first.

    The same concept can be used whereby your company is going to purchase an asset for cash. Instead consider making a contribution to pension and getting tax relief on the contribution. Then lend the money back to the company to purchase the asset and get tax relief again.

More to come 

I will be writing more on tax planning in future weeks as more opportunities become available. Now the 2011 finance act has received Royal Ascent there is coming on stream planning to reduce capital gains tax, reduce tax on extraction of retained reserves from trading and investment companies and further income tax and corporation tax planning. If you have any questions on any of these ideas I’m happy to explain them further.

Andy Parker
Chartered Accountant and Chartered Financial Planner

*The stamp duty tax saving strategies mentioned in this blog are no longer available.

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here