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Save your family thousands By Jeff Salway
Four in every five of us wasted £7.6 billion in tax last year - £2.9 billion in unclaimed tax credits, £1.3 billion in inheritance tax and £319 million by non-taxpayers paying tax on savings and investments. With the Every generation can avoid tax waste, even four-year-old Charlie. His parents, Rob and Alison, could benefit by sheltering their savings from the Inland Revenue. Rob's older brother, Stephen, a higher-rate taxpayer, is losing an increasing amount of money on tax every year - as are their parents, David and Susan. David's mother, Katherine, can do the most to get the better of the Inland Revenue, with a large house and a hefty pot of savings, the family faces a large inheritance tax bill when she dies. Charlie Children have the same tax allowances as adults, however, to prevent parents attempting to elude the Inland Revenue by holding savings in their child's name, any income over £100 is taxed at their highest rate. If anyone else pays money in, such as grandparents, the interest is treated as the child's. All parents with a child born on or after 1 September 2002 are given a £250 voucher (or £500 if the parents are on a low income) with which to open a tax-free child trust fund. Another £250 (or £500) follows when they turn seven, and friends and relatives can top up the account by up to £1,200 a year. Couples with a combined income of up to £58,000 (or £66,000 if there's a child under the age of one) may be eligible for the two main parts of child tax credit: the family element of £545 a year (doubled in the financial year of a child's birth), plus £1,765 a year per child, rising to £1,845 in April. So Rob and Alison could miss out on £2,320. Rob and Alison Paying into a pension is the best way to save for your future, contributions made by basic-rate tax payers are topped up by 22% while those of higher-rate tax payers are topped up by 40%. It costs basic-rate taxpayers 78p to invest £1, while it only costs higher-rate taxpayers 60p. Your employer could even match your contributions. If you don't have the company option available, consider a stakeholder pension. Research claims £170 million in tax could be avoided every year if more savers opted for tax-free individual savings accounts. Each year up to £3,000 of cash savings can be invested in an ISA. Stephen To maximise his pension contributions Stephen may want to consider 'salary sacrifice' - which means asking your employer to pay pension contributions on your behalf in return for a cut in salary. This means neither you nor your employer will pay national insurance on the contribution, and will automatically save you 11%. One of the most underused tax-saving tools is investment bonds, with which income tax can be deferred for 20 years, as long as less than 5% is withdrawn each year. Stephen is also willing to take more risks to build his retirement fund by investing in an equity ISA, which allows £7,000 to be invested in shares each year. In eight years the total investment of £56,000 would grow to around £84,000, unencumbered by tax of 32.5% on the dividends. Visit Interactive Investor ISA Centre As Stephen is able to invest more than the ISA limit each year, one option is a self-invested personal pension (SIPP) in which you can invest 100% of your earnings and take it out tax-free at 55. Unlike ordinary pensions, SIPPs allow you to invest in a great range of investments and take more control of how and where your money is invested. Visit Interactive Investor SIPPs Centre Another way to grow money is through venture capital trusts (VCTs). These invest in unquoted companies, but the risk is high. If Stephen invests £10,000 in a VCT, he can reclaim £3,000 on income tax paid in the same tax year, while all dividends and capital gains are tax-free. One thing he needs to be careful of is the tax on the money he grows outside an ISA, whether it's equities, property or other assets. Always make the most of your capital gains tax allowance (£8,800 for the 2006/07 tax year). By realising gains either side of 5 April it's possible to make £17,600 tax-free. If you're married, transferring some assets to your spouse can also reduce your liability. David and Susan David plans to retire next year, and as a result both he and his wife Susan want to ensure a comfortable retirement. This has been made easier with the introduction of new pension rules, which allow up to 25% of your pension to be taken tax-free. The new rules also offer what's called an 'immediate vesting personal pension', which allows those aged between 50 and 74 to recycle their pension contributions to maximise the tax relief available. For example, if higher-rate taxpayer David puts £600 into his pension, tax relief at 40% turns that into £1,000, 25% of which he can take straight away under the 25% tax-free cash rules. After four reinvestments, David could effectively double his money, risk-free. The catch is that you can't reclaim more in tax relief in one year than you've paid in tax over that time. So, for it to be effective, a higher-rate taxpayer needs to earn around £70,000 or more. Even before he takes his tax-free cash, David has £20,000 to invest for income. One option is to put the £20,000 in an investment bond and take 5% (£1,000) a year free from additional tax. He could also take advantage of his annual ISA allowance to invest in an income-producing vehicle, such as gilts, bonds or even an income-oriented UK fund. One thing that really worries David and Susan is inheritance tax. First they should ensure that any life insurance policies are written in trust. Another option worth considering is a 'tenants-in-common' will which works by splitting ownership of their home in two, so that when either dies, half of its value is passed to Stephen and Rob, rather than to the surviving spouse. Finally, Susan should complete form R85 because, since she gave up work, she hasn't informed HMRC that she is no longer a taxpayer and so is still paying tax on her savings. Katherine If you're over 60 you may be entitled to pension credit which guarantees an income of at least £114.05. About £1.1 billion in council tax benefit goes unclaimed every year - an amount that could cut your annual bill by £540. Katherine's house is worth £500,000 and she has a large amount in other savings and investments. Should she die without making plans to reduce her IHT bill, her family will have to pay a tax charge of 40% on everything over £300,000 (based on 2007/08 allowances). Katherine's happy to give some money away, which can be achieved using a trust. This allows you to ringfence a portion of your assets for those you want to hand them down to, while retaining control over them while you're alive. Also, she could make a gift to charities, alongside gifts to political parties, tax-free.
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