TaxSource Total

TaxSource Total

Here you can access and search:

  • Articles on tax topical matters written by expert tax professionals
  • These articles also feature in the monthly tax journal called tax.point
  • The articles are displayed per year, per month and by article title

Year-end Tax Planning and Reminders

Sherena Deveney

By Sherena Deveney, Head of Private Client Services, EY Belfast

sdeveney@uk.ey.com

In this article Sherena discuss some of the options available to help individuals reduce their tax bill both in terms of the tax year end looming, and as an annual reminder of the options available.

Year-end tax planning can be a simple and effective way of reducing your tax exposure. The current UK tax year will end on 5 April 2019, therefore time is of the essence to take some small steps which can have a large impact on reducing your tax bill.

Personal Income Tax

For the 2018/19 tax year, each taxpayer is entitled to the following reliefs and allowances where income can be earned before tax is payable. These allowances cannot be carried forward. Use it, or lose it.

Personal Allowance

£11,850*

Dividend Nil Rate Band

£2,000

Personal Savings Allowance

£1,000 – Basic Rate
£500 – Higher Rate
£0 – Additional Rate

*Reduced by £1 for every £2 of income above £100,000

Minor children are also entitled to these tax-free allowances. Dependent upon the sources of income, children may be able to avail of their own reliefs separate to their parents and maximise tax relief within the family. For children under 18, income exceeding £100 per tax year, originating from a parental gift would be taxable on the parent.

The Personal Allowance is reduced by £1 for every £2 of income above £100,000. In 2018/19, taxpayers with earnings between £100,000 to £123,700 can suffer an effective income tax rate of up to 60%. In turn therefore, tax relief of up to 60% can also be available on pension and gift aid payments, by virtue of reducing adjusted income, and reinstatement of the Personal Allowance.

Gifts to charity via a Gift Aid (GA) donation can also attract additional tax relief. For basic rate taxpayers, relief is given at source on making a GA declaration. Higher rate and additional rate taxpayers can claim the extra tax relief of 20% and 25% respectively via their tax return or an adjustment to their tax code.

There is no upper limit on the level of GA donations that can be made, except that the taxpayer must have paid sufficient tax to cover the tax relief claimed by the charity, or the taxpayer will face an additional tax liability to make good the difference.

TOP TIP If you make GA donations between 6 April and the date you submit your prior year tax return, you can elect for these donations to be treated for tax purposes as donations made in that prior year. You can do this, by making the election on your tax return and submitting it by the filing deadline. This would be of benefit if you are in a higher tax bracket in the prior year, to assist with reinstatement of a Personal Allowance, or to simply accelerate the tax relief to the earlier tax year.

Married couples and civil partners can avail of additional opportunities for effective tax planning. It is possible to transfer income producing assets between spouses to ensure both partners fully utilise their Personal Allowances and basic rate tax bands.

If a spouse owns an income-producing property, and gifts a share of the beneficial or capital interest to their spouse, the default position for reporting taxable profits is 50:50, irrespective of the capital apportionment. Alternatively, they may make an election that the profits should follow the capital interest held.

Conversely, unmarried joint owners of property can agree to divide profits independently of the capital position, and report them on this basis.

For lower income civil partners and married couples, the Marriage Allowance may be available and can be back-claimed for any tax years you are eligible since 5 April 2015. In 2018/19, this will allow a lower-earning spouse to transfer £1,190 of their unused Personal Allowance to their partner, saving up to £238 in tax each year. To avail of this relief, the higher earning spouse must be a basic rate tax payer.

For spouses with children, it is useful to remember that child benefit is withdrawn by 1% for every £100 of income earned over £50,000 based upon the higher earning spouse. The child benefit is therefore reduced to nil when income reaches £60,000.

TOP TIP If you are married with children, it may be possible to transfer income-producing assets from one spouse to another so that both partners’ incomes remain below the £50,000 threshold for the High-Income Child Benefit Charge.

Capital Gains Tax (CGT)

For the 2018/19 tax year, each taxpayer is entitled to a CGT Annual Exemption of £11,700 before CGT is payable. The Annual Exemption cannot be carried forward or transferred, therefore use it or lose it.

Married couples and civil partners can transfer assets between each other and the transfer is deemed to have taken place at a no gain and no loss basis, meaning a chargeable capital gain does not arise.

If there has been a marital breakdown in the tax year and you have permanently separated from your spouse, the ‘no gain, no loss’ rules will only apply up to the end of the tax year of separation. Transfers taking place after this may be based on the open market value of the transfer. If this affects you, you may wish to consider transferring assets by 5 April 2019 to avail of the transitional rules for separating spouses.

TOP TIP If you are married or in a civil partnership and thinking of selling a chargeable asset, consider whether any amendment to the ownership position between you should be made prior to disposal, so that you can fully utilise the annual exemption for each spouse. Antiavoidance legislation should always be considered before such a transfer is made.

CGT is payable at a reduced rate of 10% on assets which qualify for Entrepreneurs’ Relief (‘ER’). The qualifying conditions surrounding ER can be complex and are not be covered in detail in this article, however where an asset qualifies and the disposal is on or after 6 April 2019, the minimum holding period for qualifying assets has been extended from 12 months to 24 months.

Inheritance Tax (IHT)

Whilst IHT is not really a year-end planning consideration in isolation, utilising a combination of CGT and Income Tax (IT) reliefs with IHT planning in mind can be a useful step to consider.

IHT is payable at 40% on the value of an individual’s death estate and the value of any gifts made in the seven years prior to death. There are a number of exemptions, reliefs and allowances that can be available, and I would refer you to my article ‘UK Inheritance Tax Reliefs’ in the August 2015 issue of tax.point for a more detailed review of these.

However, a brief reminder of some of the smaller but very useful IHT reliefs available is worthwhile.

To reduce the value of a taxable estate on death and limit the amount of any IHT payable, a taxpayer may wish to consider gifting assets during their lifetime. These gifts should fall outside the IHT net after seven years, provided a benefit is not reserved in the asset transferred. Gifts to individuals are ‘potentially exempt transfers’ and only chargeable to IHT if death occurs within seven years. Gifts to relevant property trusts are however chargeable lifetime transfers and can be subject to a 20% life-IHT charge, if the available Nil Rate Band (NRB) is exceeded.

Careful planning on timing of gifts should be undertaken if the donor is gifting to individuals and also considering gifting to relevant property trusts, to ensure ordering is the most beneficial in the event of a death within seven years of gift.

The following IHT reliefs are available annually on gifts made, whether cash or assets. It is useful to keep a record of the gifts you make each year and whether they utilise any of your annual exemptions.

TOP TIP If 10% of your net estate is donated to charity on death, your IHT rate is reduced from 40% to 36%. A carefully drafted will is essential to ensure that the desired result is achieved, therefore as part of any IHT planning, an up-to-date and professionally drafted will is always recommended.

IHT annual exemptions

Annual gifts exemption

£3,000
(+£3,000 from the prior tax year, if unused)

Can offset against larger gifts or a combination of gifts.

Small gifts exemption

£250 per donor, per recipient

Gifts exceeding this limit will not attract the relief

Gifts made in consideration of marriage

£5,000 to your children,
£2,500 to your grandchildren,
£1,000 to anyone else

Specific rules for availability

The ‘normal expenditure out of income exemption’ is one of the most valuable of the annual IHT reliefs. Whilst it is not in itself an annual exemption, the rules around its availability, such as requiring pattern/frequency, and the link to the individual’s standard of living, make this one to keep under annual review to ensure relevant gifts still meet the requirements.

Where this exemption is available, such gifts are tax-free, even where death occurs within seven years. This exemption has a number of opportunities of use, including gifts to beneficiaries, funding of policies for others such as life and pension, or making regular gifts into trust.

It is of course important to consider whether other taxes would be triggered with such planning, such as CGT, IT, or Stamp Duty Land Tax.

EXAMPLE A parent makes contributions of £2,880 (net) per annum to their child’s personal pension fund. If these annual contributions are maintained for 25 years and the pension grows at an average rate of 4% per annum every year, at a retirement age of 55, the pension pot will have an estimated value of over £500k!

Pensions

Personal pension contributions within the Annual Allowance (the standard allowance is currently £40k) and the overall lifetime limit of £1.03 million (2018/19) attract tax relief at your marginal rate.

Each year an individual can contribute and attract tax relief on the higher of £3,600 or 100% of their qualifying earnings to their pension, up to the annual allowance available to them. Qualifying earnings include salary, bonuses, income from self-employment and profits from furnished holiday lettings. This means that lower earning spouses and children with no income can still benefit from making pension contributions of £3,600 (£2,880 net) each year.

Pension contributions are particularly tax-beneficial for individuals who are in a higher tax bracket or with income between £100,000 and £123,700 who are at risk of having their Personal Allowance tapered.

In addition to the tax relief on contributions, tax-free growth within the fund, and the ability to take up to 25% tax-free lump sum on retirement makes a pension plan a tax efficient savings vehicle. With the benefit of pension flexibility rules, and the fact that it can also be structured so that a pension value is not considered an asset in a person’s IHT estate, there are a number of tax benefits to boosting a pension fund. Saving for retirement should regularly be considered as part of the year-end tax planning process.

If someone is already a member of a registered pension scheme they may be able to carry forward any unused Annual Allowance from the previous three years to increase the contribution they can make before 5 April 2019.

With effective from 6 April 2016, if you are a high-income earner (over £150k) the Annual Allowance of £40k is tapered and can be reduced to £10k per annum. There is also a £4k annual limit on future contributions where someone has already activated pension benefits and a detailed review of the rules is recommended if this affects your client.

Tax Favoured Investments

Each UK resident individual aged 18+ has an Individual Savings Account (ISA) investment allowance of £20,000 for 2018/19.

TOP TIP Review the availability of any unused Annual Allowance from 2015/16, as the last opportunity to benefit from this tax relief is 5 April 2019. To access this earlier year’s relief, you must first fully utilise the current year’s Annual Allowance.

Parents can also fund a junior ISA with up to £4,260 per child for 2018/19 making a total of £48,520 for a family of four before 5 April 2019. Children will automatically have access to the funds in their ISA when they reach age 18 but ISAs are a useful vehicle for building up funds to support children through higher education.

Generally, if you give money to your own children the interest earned on the funds must not exceed £100 per tax year, otherwise you (the parent) will pay tax on it at your marginal rate. A key advantage of Junior ISAs is that they are excluded from this rule.

TOP TIP There is also a new ‘Help to Buy’ ISA available for first time buyers where the Government will top-up the ISA value made into the scheme by 25%. The maximum savings are £12k and there are limitations on how much can be saved each month and on initial deposit. A qualifying couple could each set one up, and for the cost of £24k, have a pot of £30k against their first home purchase.

Although perhaps considered a more sophisticated level of tax-driven investment, for those who are interested in shares and prepared to accept the related invested risk, there are a number of tax reliefs available for investing in tax-efficient investments such as, Enterprise Investment Schemes (EISs) and Seed Enterprise Investments Schemes (SEISs).

Subscription for EIS or SEIS shares can offer a number of tax benefits, which have been summarised below.

Under EIS, your income tax liability for the year may be reduced by up to 30% of the subscription. The maximum subscription you can claim relief under EIS is £1m in 2018/19 or up to £2m if you invest in Knowledge Intensive Companies. Investments made during the 2018/19 tax year can be carried back and treated as made in the previous tax year.

SEIS offers relief for investors who subscribe for shares in small start-up companies. For 2018/19, the maximum qualifying investment is £100,000. Income tax relief is given at the rate of 50% of the subscription, and as above relief may be given against tax in the current or preceding tax year.

Another benefit of EIS subscription is capital gains tax deferral. A taxpayer can match an EIS subscription to a gain made in the previous 12 months or following 36 months, resulting in a deferral of the CGT and cash flow advantage. The gain comes back into charge when the EIS shares are disposed, at the relevant CGT rate.

In comparison, an SEIS investment can exempt an otherwise chargeable gain entirely from CGT, up to a value of 50% of the subscription made. However, the CGT exemption is matched to the tax year in which the IT is claimed, and therefore if you carry back the SEIS for IT purposes, the SEIS Capital Gains Tax exemption is also carried back.

There are other tax benefits which run through both EIS and SEIS, including the exemption of the subscription shares from CGT on a qualifying disposal, potential availability of Business Property Relief on the value for IHT purposes, and the opportunity to convert a capital loss to an income tax loss, in the event of a loss on the subscription. Thus, for an additional rate taxpayer making a qualifying EIS subscription of £100k, a maximum loss of £38.5k is made compared to the full £100k on a non-EIS shareholding in total loss, due to income tax reliefs available on subscription, and income loss claim. It must remain qualifying throughout the minimum holding period of three years or various reliefs are not available/will be clawed back.

Venture Capital Trusts (VCTs) are quoted investment trusts that invest in a range of relatively small trading companies. Each year you can subscribe for up to £200,000 of shares in a VCT and claim tax relief of up to 30%. Any dividends paid on your VCT investment are usually free of income tax. After a holding period of five years, any growth in the value of your VCT investment is not subject to CGT. However, VCT investments do not afford CGT reliefs, IHT protection, or income tax loss benefits, like EIS and SEIS.

It is also worth remembering that combining some reliefs and allowances can have an unexpected effect. For example, consider a claim for both higher rate relief on gift aid, together with an EIS income tax claim, and whether it may produce a more tax beneficial result if these reliefs were claimed in two different tax years, rather than the same year.

This article seeks to highlight some of the key areas you may wish to consider in advance of 5 April 2019 as well as reminders of some areas that benefit from a review annually. By taking proactive measures, you may be able to improve your tax position and lower your effective rate of tax. Please note these are general comments only, written in broad terms and a tailored approach to each set of personal circumstances is recommended.

Furthermore, this article is written in terms of tax benefit, and whilst it includes some investment structures, it is important to remember that investments can fluctuate and a financial advisor can assist to ensure the financial and investment position, and not just the tax benefit, is clearly understood.