Legitimate tax planning measures
Every ATX exam asks you to reduce someone's tax, through requirements such as "advise on how the tax payable could be reduced", in the Section A case study and in Section B questions alike. The examining team wants standard, legitimate planning: the reliefs, exemptions and choices that the law offers and expects taxpayers to use, applied to the client in front of you. It does not want clever schemes, and it penalises advice that crosses into avoidance. This lesson gives you the toolkit, tax by tax, and shows how to turn it into numbers. The figures quoted come from ATX's tax tables unless they are flagged as not in the tables, in which case learn them.
What makes planning legitimate
A measure is legitimate when it does three things:
- It uses the law as Parliament intended. A pension contribution, an ISA, a transfer between spouses, a claim for business asset disposal relief: each exists to be used.
- It changes something real. The asset is genuinely given away, the money is genuinely invested, the business genuinely changes hands. Planning that leaves everything as it was apart from the tax is suspect.
- It is transparent. Nothing is hidden from HMRC, and the return reflects what actually happened.
| Tax planning (mitigation) | Tax avoidance | Tax evasion | |
|---|---|---|---|
| What it is | Using reliefs and choices as intended | Using the letter of the law against its purpose, often through contrived steps | Deliberately misleading HMRC: hiding income, inventing expenses |
| Legal? | Yes | Legal, but may be defeated by targeted rules or the GAAR, with penalties | No: a criminal offence |
| Your role | Advise on it | Explain the risks and decline to promote it | Refuse; consider your money laundering duties (lesson 5) |
The five levers
Almost every legitimate measure pulls one of five levers. Use them as a checklist when a requirement asks how tax could be reduced.
| Lever | The question to ask | Typical measures |
|---|---|---|
| Allowances and bands | Is every allowance, nil rate band and exemption being used, by everyone? | Personal allowances, savings and dividend nil rate bands, the £3,000 annual exempt amount, IHT nil rate bands and exemptions |
| Who is taxed | Could the income or gain belong to someone (or something) taxed at a lower rate? | Assets moved to a spouse or civil partner; trading through a company; employing family members |
| When | Would a different date move the tax to a lower-rate year, or simply later? | Disposals after 5 April; capital spending before the year end; gifts made early to start the seven-year clock |
| What form | Would the same economic result be taxed less in another form? | Dividend or salary or pension contribution; shares or assets; branch or subsidiary |
| Which reliefs | Is a relief or election available that has not been claimed? | Business asset disposal relief, gift relief, incorporation relief, rollover relief, EIS deferral, group relief, the SSE, loss relief choices |
Income tax and NIC
| Measure | What it saves | Watch out for |
|---|---|---|
| Transfer income-producing assets (savings, shares, let property) to a spouse or civil partner with unused allowances or a lower rate | Up to 45% of the income moved | It must be an outright gift with no arrangement to return it; jointly held assets are taxed 50:50 unless a declaration of unequal ownership is made |
| Personal pension contributions | Tax at the marginal rate; 60% where they bring adjusted net income from up to £125,140 down towards £100,000 | The annual allowance; the money is locked away |
| Employer pension contributions instead of salary or bonus | Income tax and all NIC | Remuneration must be reasonable for the work done |
| Owner-managers: a small salary plus dividends | Dividends carry no NIC, although they come from taxed profits while salary is deductible | The best mix depends on the company's marginal rate (lesson 4) |
| ISAs for each spouse | Tax on income and gains, within £20,000 each a year | Annual limit cannot be carried forward |
| Gifts to minor children | Use of the child's allowances | Income over £100 a year from a parent's gift is taxed on the parent (not in the tables: learn it); gifts from grandparents are not caught |
| A claim, or no claim, under the foreign income and gains regime for a qualifying new resident | Exempts foreign income and gains for up to four years (not in the tables: learn it) | Loses the personal allowance and annual exempt amount for that year; compare both positions |
Capital gains tax
| Measure | What it saves | Watch out for |
|---|---|---|
| Transfer part of an asset to a spouse or civil partner before sale (no gain/no loss) | A second annual exempt amount and possibly 18% instead of 24% | Genuine, unconditional gift; the spouse keeps the proceeds |
| Sell after 5 April, or split a disposal across two tax years | A second annual exempt amount; tax due a year later | Market risk while waiting |
| Meet the conditions for business asset disposal relief before selling | 14% instead of 24% on up to £1,000,000 of lifetime gains | Conditions must be met for two years before the disposal (not in the tables: learn it) |
| Gift relief, incorporation relief, rollover relief, EIS deferral | Defer the gain, sometimes until death, when it falls away | The recipient or new asset takes a lower base cost |
| Set losses against gains that would not get business asset disposal relief | Losses save 24% instead of 14% | Current-year losses must be set off first and cannot be restricted |
Inheritance tax
| Measure | What it saves | Watch out for |
|---|---|---|
| Lifetime gifts (potentially exempt transfers) | 40% on the gift, if the donor survives seven years; growth after the gift is always outside the estate | The donor must give up the asset: a gift with reservation of benefit stays in the estate |
| Exemptions: the £3,000 annual exemption (plus last year's if unused), £250 small gifts, gifts on marriage, normal expenditure out of income | Immediate exemption, no seven-year wait | None of these figures is in the tables: learn them |
| Leave the home to direct descendants and keep the estate at or below £2,000,000 | The residence nil rate band of £175,000, saving up to £70,000 | It is withdrawn by £1 for every £2 above £2,000,000 (not in the tables: learn it) |
| Leave at least 10% of the baseline estate to charity | The rate on the rest falls from 40% to 36% (not in the tables: learn it) | The charity legacy itself must be wanted |
| Keep assets qualifying for business or agricultural property relief until death | Relief of up to 100%, and a CGT-free uplift to market value on death | Relief can be lost if the business stops trading |
| Vary the will within two years of death (not in the tables: learn it) | Redirect assets to the next generation, or to use a nil rate band, read back to the date of death for IHT and CGT | The person giving up the inheritance must agree |
Corporation tax and business
| Measure | What it saves | Watch out for |
|---|---|---|
| Surrender group losses to companies with augmented profits between the limits (26.5%) first, then 25%, then 19% | The difference in marginal rates | Associated companies divide the limits |
| Time capital expenditure before the year end | Relief a year earlier (full expensing, AIA) | Spending must make commercial sense |
| Sell a subsidiary's shares rather than its assets | The SSE can exempt the whole gain | The buyer may prefer assets |
| Use a branch while overseas operations make losses; a subsidiary or the branch exemption once profitable | UK relief for losses, then lower overseas rates | The branch exemption election is irrevocable |
| Choose loss relief claims for the highest saving and earliest repayment | Tax at the higher rate, and repayment interest | Carry-back periods and order of set-off |
VAT and stamp taxes
| Measure | What it saves | Watch out for |
|---|---|---|
| Voluntary VAT registration where customers are registered | Input VAT recovery at no cost to customers | Administration; unregistered customers would pay more |
| Cash, annual or flat rate scheme for small businesses | Cash flow or administration | Eligibility limits |
| Transfer a business, or a let building, as a going concern | VAT on the price, and the SDLT on that VAT | Conditions for the buyer, including opting to tax |
| Buy shares rather than assets | 0.5% stamp duty instead of SDLT of up to 5% on the property | The buyer inherits the company's history |
Worked example
Emeka Bello is employed on a salary of £180,000. He has £200,000 on deposit earning 4% interest (£8,000 a year). His wife, Adaeze, earns £10,000 from part-time work and has no other income. In March 2026 Emeka plans to sell quoted shares (not eligible for business asset disposal relief) with a gain of £30,000; he has made no other disposals. He also wants to give £100,000 to his son, and his estate is well above the nil rate bands. Advise on three measures for 2025/26.
Measure 1: move the deposit to Adaeze. Emeka's income is over £125,140, so he has no personal allowance and no savings nil rate band: his interest is taxed at 45%, £8,000 × 45% = £3,600 a year. In Adaeze's hands:
| Adaeze's income tax with the interest | £ |
|---|---|
| Salary (non-savings income) | 10,000 |
| Interest | 8,000 |
| Total income | 18,000 |
| Personal allowance: £10,000 against salary, £2,570 against interest | (12,570) |
| Taxable income (all savings) | 5,430 |
| £5,000 at the 0% starting rate for savings | 0 |
| £430 within her £1,000 savings nil rate band | 0 |
| Income tax | 0 |
Saving: £3,600 a year, provided the transfer is an outright gift.
Measure 2: give Adaeze half the shares before the sale. The transfer is at no gain/no loss, so each spouse makes a gain of £15,000.
| CGT | Emeka sells all £ | Emeka sells half £ | Adaeze sells half £ |
|---|---|---|---|
| Gain | 30,000 | 15,000 | 15,000 |
| Annual exempt amount | (3,000) | (3,000) | (3,000) |
| Taxable gain | 27,000 | 12,000 | 12,000 |
| CGT at 24% / 24% / 18% | 6,480 | 2,880 | 2,160 |
Adaeze's taxable income is £5,430 (Measure 1), leaving £32,270 of her basic rate band, so her whole taxable gain is taxed at 18%. Total CGT falls from £6,480 to £5,040: a saving of £1,440. Selling Emeka's half after 5 April 2026 instead would also give him a second annual exempt amount and push his tax payment back a year, at the cost of market risk.
Measure 3: make the gift now and use the exemptions. If Emeka has made no other gifts in 2024/25 or 2025/26, two annual exemptions cover £6,000 of the gift and the potentially exempt transfer is £94,000. If he survives seven years, the whole £100,000 has left his estate, saving up to £40,000 (£100,000 × 40%). If he dies within seven years, the £94,000 becomes chargeable, but at its value when given, so any growth is still outside his estate. Regular gifts out of surplus income, such as paying into a savings plan for his grandchildren, would be exempt at once.
| Summary | Saving |
|---|---|
| Deposit transferred to Adaeze | £3,600 a year |
| Half the shares transferred before sale | £1,440 |
| Lifetime gift, surviving seven years | Up to £40,000 of inheritance tax |
Common mistakes
- Listing measures without numbers: "transfer assets to his wife" earns little; "saving £3,600 a year" earns the marks.
- Recommending a transfer between spouses with strings attached, or one that leaves the income with the original owner.
- Forgetting that an additional rate taxpayer has no savings nil rate band, or that the starting rate for savings is available only where non-savings taxable income is below £5,000.
- Treating a gift as saving 40% immediately: a potentially exempt transfer saves inheritance tax only if the donor survives seven years.
- Suggesting a measure the facts rule out, such as business asset disposal relief on quoted shares bought as an investment.
Exam technique
Read the requirement for its scope (which taxes, which taxpayers, which year) and its verb: "explain" needs the reason, "calculate" needs the number, and "advise" needs both and a conclusion. Run the five levers over the scenario and pick the two or three measures that fit the facts; the examiner has planted the clues (a spouse with no income, a disposal just before 5 April, an elderly client with a large estate). For each measure, write one line on what to do, one on why it works, and the saving.
Study with AI
I am studying ACCA Advanced Taxation (ATX-UK), Finance Act 2025: legitimate tax planning.
Describe a UK resident married couple with different incomes, some savings, a planned
share sale and a large estate. Ask me to suggest three legitimate measures to reduce
their income tax, CGT and inheritance tax, and to quantify each saving for 2025/26.
Wait for my answer, then mark it, correct any workings using the rates in ACCA's ATX tax
tables, and tell me any measure I missed.AI assistants sometimes suggest schemes that would fail under the GAAR, or use old allowances: check every suggestion against these notes before you rely on it.
Lecturer's note: The best planning answers are boring, and that is the point. The examining team is not looking for a clever idea nobody has thought of; it is looking for the obvious measure the facts are begging you to use, worked out properly. A wife with unused allowances, a disposal in March, a wealthy widower with grandchildren: each is a clue, and each clue leads to a standard measure with a number. Find the clue, name the measure, show the saving.
Key points
- Legitimate planning uses reliefs as intended, changes something real and is fully transparent; avoidance and evasion are different things, with different consequences.
- Use the five levers as a checklist: allowances and bands, who is taxed, when, in what form, and which reliefs are claimed.
- Moving income and gains to a spouse with unused allowances or lower rates is one of the most valuable measures, provided the gift is outright.
- Timing matters: disposals after 5 April, spending before the year end and early lifetime gifts each change the tax.
- Every measure needs a number and a condition: what it saves, and what must be true for it to work.
Quick check
- A higher rate taxpayer with a £20,000 gain on quoted shares transfers half to her spouse, who has no other income or gains, before the sale. What CGT is saved?
- How much tax is saved by moving savings producing £10,000 of interest from an additional rate taxpayer to his wife, whose only other income is a salary of £30,000?
- A widow with an estate of £2,100,000, including her home left to her daughter, gives away £100,000 now and survives seven years. What residence nil rate band does her estate get?
Answers
- Without planning: (£20,000 − £3,000) × 24% = £4,080. With planning: (£10,000 − £3,000) × 24% = £1,680, plus the spouse's (£10,000 − £3,000) × 18% = £1,260, total £2,940. Saving £1,140.
- He pays 45% with no savings nil rate band: £4,500. Her non-savings taxable income is £17,430, so no starting rate is available, but she gets the £1,000 savings nil rate band and stays within the basic rate band: (£10,000 − £1,000) × 20% = £1,800. Saving £2,700 a year.
- Her estate falls to £2,000,000, so there is no taper: the full £175,000 (more if she inherits her late husband's unused band), instead of £175,000 − (£100,000 ÷ 2) = £125,000.