The April 5th end of tax year is fast approaching and taxpayers who want to reduce their tax bills need to consider their options. While the range of tax shelters has narrowed considerably in recent years there are still some opportunities to benefit from efficient tax planning.
Investments in pensions plans, films, property and business expansion schemes could be considered as options for reducing income tax liability. But advisers warn that taxpayers should take care not to allow "the tax tail to wag the financial dog".
Taxpayers should consider carefully what they are investing in and seek good investment opportunities rather than chase tax breaks that could tie up their finances for many years and produce low returns.
Contributions to a pension plan are a very tax efficient way of saving for the future and for self-employed people the tax breaks involved were improved considerably in the 1999 Finance Act. Up to then both self-employed people and employees making additional voluntary contributions (AVCs) could get tax relief for contributions of up to 15 per cent of their net relevant earnings.
The relief available for self-employed people, directors of family companies or employees in non-pensionable employment has increased according to age, with more relief now allowed as taxpayers get older to encourage people to provide for their retirement. In the current tax year a person aged over 50 years can get tax relief on a contribution of up to 30 per cent of their earnings - earnings from self-employment or non-pensionable employment after deducting any losses or capital allowance. Someone aged between 40 and 49 years can get tax relief on a contribution of up to 25 per cent of earnings, while for a person aged between 30 and 39 years relief is allowed on a contribution of up to 20 per cent of earnings. For people aged under 30 years, the relief level remains unchanged at 15 per cent of earnings.
A complicating factor is that there is now a cap on the earnings figure on which relief can be calculated - there was no maximum when the level allowed for relief was 15 per cent of earnings. The maximum earnings figure currently allowed for tax relief purposes is £200,000 (#253,948) so the maximum contribution on which relief will be granted is £60,000 (30 per cent of £200,000 for a person aged 50 years or more).
For the 1999/2000 tax year a self-employed person can claim for contributions paid in the year ended April 5th, 2000, as well as for amounts paid in the period April 6th, 2000, to January 31st, 2001 - the date by which his/her 1999/2000 tax return is due.
AVCs are a tax-efficient option for employees who need to increase their pension entitlement on retirement. Employees can contribute up to 15 per cent of their net relevant earnings - usually employment income.
There are Revenue restrictions to ensure that a taxpayer cannot fund to get more than the maximum pension allowed - two-thirds of final salary. But for a taxpayer at the marginal tax rate the cost of an annual contribution of £3,000 (or £250 per month) would be £1,620 (£135 per month) after tax relief.
Pension contributions are a tax-effective method of saving, but the downside is that your cash is tied up until your retirement date.
Another thriving tax shelter is investment in film-making. This has the advantage of being a short-term investment which generally ties up funds for about a year. But there is a risk of losing the funds invested if the film is a commercial failure.
Demand for these investments is high, but, as one source put it, "unless you are in the know you will not have a chance of getting into one because demand far exceeds supply".
There are two aspects to a film investment - tax relief and a possible return on the investment. An individual can invest up to £25,000 (the minimum investment is usually £5,000) in a company producing a specified film. At least half of the production cost must be incurred in the Republic and relief will only be allowed on the amount spent by the company in the Republic.
A taxpayer will get relief on 80 per cent of his or her investment at the marginal rate. On an investment of £25,000 the relief would be £9,200 (44 per cent of 80 per cent of £25,000) in the current tax year. Relief comes in the form of an increase in the taxpayer's tax free allowance. So the effective cost of a £25,000 investment for a top rate taxpayer becomes £15,800. To get the tax relief the individual has to make the investment. The film-fund promoter will supply the taxpayer with a form from the Revenue Commissioners confirming that the individual is entitled to an increased tax-free allowance. The taxpayer then submits this form to the tax inspector who will either adjust their tax-free allowance or calculate the tax refund due. On completion of the production, the production company is liquidated and the investor gets a return out of the proceeds of the sale of the film. Market sources say returns of about 74p for every pound invested could be expected giving a return of £18,500 on a £25,000 investment. Since tax relief would already have reduced the cost of the investment to £15,800, the taxpayer would get an overall return of about 17 per cent over about a one-year period. Most deals are structured so that the film investment produces a loss (for example, a return of 74p per pound invested) and the film producer takes some of the taxpayer's tax breaks. But good deals still give taxpayers an opportunity to make a good overall return on their investment.
Business Expansion Scheme investments could be used to reduce tax bills but, again, the opportunities available are limited since the cap on the amount any company could raise through a BES was cut from £1 million to £250,000. But an individual investor can still get relief at his/her top tax rate for up to £25,000 invested in a Revenue-approved scheme. With many of the funds now raised privately for smaller companies through business advisers, potential investors may find it difficult to locate a suitable opportunity.
Property investment used to offer very lucrative tax breaks, but many of these have now been cut bank or ring-fenced and property sources say there is a shortage of Section-23 type investment opportunities. Section 23 type relief gives an investor an allowance equal to the construction cost (approximately) of the property which can be spread over 10 years to give an annual allowance which can be set off against any rental income from the property concerned.
Any unused annual allowance can be set off against other rental income but not against any other personal income such as income from employment or investment income.
Property which qualifies for Section 48 relief is currently being advertised. This relief allows an investor who buys a house in an approved development in a designated seaside resort to get the Section 23-type relief described above. To qualify for relief the investor must comply with a number of conditions including renting the house out to tourists for specified periods.
Property sources warn investors to assess carefully the potential for capital appreciation when making an investment decision. One source suggested that many of the tax-based properties involved are "fairly expensive for what you are getting".
Large investors may be able to reduce their tax bills by joining a consortium to invest in industrial buildings where allowances can be offset against a maximum of £25,000 of non-rental income.
As tax rates fall the opportunities to shelter income through tax-based schemes are narrowing. Tax advisers expect the moves to restrict and clawback the remaining tax shelters to continue with Government policy becoming more targeted on rewarding risk-takers rather than providing handy tax shelters for wealthy people.
