Can you avoid the super tax?

The proposed introduction of the new 50% tax rate from April 2010 for those with an income of £150k+ has resulted in a plethora of mitigation options from "experts". These ideas have ranged from the sensible to the crazy. The unfortunate truth is that real opportunities are limited. Below we look at what the options really are and what the pitfalls might be.

Accelerate the surrender of bonds

Higher rate taxpayers incur an income tax liability when effecting surrenders from non-qualifying life policies (often referred to as bonds) - whether offshore or onshore. The temptation will be to accelerate such surrenders into the current tax year. This can be effective.

Warning: The date on which such a surrender is taxed relates to the "policy year" (not the tax year). Be sure that any surrenders will be taxed pre April 2010.

Use husband and wife companies

A taxpayer operating a business can allow their spouse to have (for example) 50% of the shares regardless of their involvement in the business. The new 50% band simply extends the advantage of such arrangements, as well as more straightforward ones such as transferring income-producing capital to a lower-earning spouse.

Warning: It is imperative that such arrangements are set up correctly, otherwise they will fail. Also, be warned that this option may be short-lived as the Government wants to block it.

Bring forward the payment of dividends and bonuses

Clearly, you will benefit by accelerating the payment of any dividends from your own company to pre 6 April 2010. Some commentators have extended this idea to paying, for example, three years’ salary in return for the employee waiving rights to salary for the same period.

Warning: Although the "accelerated salary" will work, it is fraught with potential danger and, in our view, should only be used for family companies.

Executive remuneration - convert income to capital

Next year, the difference between income tax (up to 50%) and Capital Gains Tax (up to 18%) will be greater than ever and hence the growing attraction of converting income to capital, especially in the field of executive remuneration (ie the use of share options and similar).

Warning: The legislation in the area of employee incentives is highly complex and requires professional advice. Other "conversion" techniques are subject to the imposition of longstanding and byzantine anti-avoidance legislation. Tread with caution!

Close bank accounts

Interest on bank deposits is paid at regular intervals, sometimes annually. If a significant interest payment is due in, say, May, the only sensible way of accelerating this is likely to be by way of closing the account.

Warning: Check the banks’ penalties.

Change accounting periods

If you run an unincorporated business, a change of accounting date can have the effect of accelerating profits into 2009/10.

Warning: The rules dealing with this are complex and often have unexpected effects. Take professional advice.

What now?

Most of the techniques described above require professional advice before implementation and individuals should consult their financial advisor before acting.

Andy White
Partner, Carter Backer Winter LLP
Part of the MGI association
www.mgi-uk.com