With just over two weeks remaining of this tax year, time is running out for taxpayers to review their financial affairs. This is the moment to make sure tax reliefs and exemptions have been maximised and all planning possibilities considered.
This Insight shares our top tips for tax planning ahead of the 2019/2020 tax-year end. However, the advice offered here is by no means exhaustive and discussion with a professional advisor is recommended.
Personal Allowance (PA) reduction
For every £2 of income exceeding £100,000, the PA (£12,500 for 2019/20) is reduced by £1 until income exceeds £125,000, when the allowance is lost. Income within this range is subject to tax at a marginal rate of 60%, excluding National Insurance Contributions. This is the highest tax rate payable. Individuals whose income falls within this threshold may therefore wish to consider reducing their taxable income to maintain all or some of the PA. Examples of how this might be achieved include:
- Using the family
Where one spouse has a marginal tax rate higher than the other, the overall tax burden may be reduced by transferring assets between the two parties. For instance, investments or rental properties can be exchanged between spouses without triggering any immediate Capital Gains Tax (CGT) liabilities. This solution might reduce a spouse’s income below the 60% threshold or to move them from the additional-rate band into the higher-rate band. Anti-avoidance provisions must, however, be considered carefully in such transactions.
- Timing of income receipts
Business owners may have control over the timing of their income receipts. It can be worthwhile considering delay or acceleration, depending on whether a taxpayer is expecting to have higher income levels in 2019/20 or 2020/21. Care should be taken when considering a deferral of income, as there are specific rules determining how and when certain types of income are taxed.
Despite continuous tinkering, pensions have for many years provided opportunities for tax efficiency.
Tax relief can generally be claimed on contributions up to the Annual Allowance (AA) (£40,000 for 2019/20), or relevant earnings (if these are lower). However, anyone under the age of 75 can receive tax relief on contributions up to £3,600 in 2019/20.
The AA for 2019/20 is increased by any unused AA from the three previous tax years. Therefore, any unused AA from 2016/17 will be lost after 5 April 2019. Advice should be taken by anyone earning over £150,000 as the AA may be reduced to as little as £4,000. Pension contributions may be deducted when calculating any abatement of the PA and are attractive to those earning between £100,000 and £125,000.
To avoid punitive tax charges, pension savers should make sure the value of their pension funds does not exceed the Lifetime Allowance (£1.055m for 2019/20).
- Charitable giving
Tax relief is available on donations made to UK charities and certain charities within the EU. Relief is generally given on cash donations made under the Gift Aid scheme. Payments are made net of 20% tax and the receiving charity will claim this back from Her Majesty’s Revenue & Customs (HMRC). Higher and additional-rate taxpayers can extend their respective tax bands by the gross donation to claim further tax relief at 40% and 45% respectively. If there is sufficient taxable income, tax relief can be claimed on donations either in the year of donation or in the previous tax year. The gross donation is also deducted from other sources when considering any necessary reduction in the PA. Administered by Messrs. Hoares Trustees, the Master Charitable Trust (MCT) is a donor-advised fund set up to simplify charitable giving and philanthropic activities. Donors can create and name their own fund, make an initial lump sum contribution through cash, shares or other assets, and add further donations as they wish. Tax relief is available on contributions to MCT and can reduce the administrative burden of collating Gift-Aid claims at the end of the tax year. For further advice on MCT and charitable giving, please contact Chris Harden or Diviya Gosrani
- Interest-relief restriction for property businesses
From 6 April 2020, relief for private landlords on loan interest incurred as part of a rental property business will be restricted to 20%. Consideration should be given as to whether incorporation may be beneficial.
Tax Efficient Investments
There are various other options acknowledged by HMRC to provide tax savings for UK taxpayers. Some of these include:
- Individual Savings Accounts (ISAs)
Contributions up to £20,000 can be made to ISAs for 2019/20 (£4,368 for junior ISAs, increased to £9,000 for 2020/21). ISAs can be invested in a wide range of assets and are not subject to income tax or CGT. It is easy, however, to overlook the fact that, generally, ISAs still form part of an estate for IHT purposes.
- The Enterprise Investment Scheme (EIS)
Relief can be obtained on subscription of new shares in relatively small qualifying trading companies that are not listed on any stock exchange. 30% income tax relief on up to £1m invested (£2m if the investment is in a knowledge-intensive company) can be claimed in the year of investment or in the previous tax year. EIS shares qualifying for income-tax relief are also exempt from CGT after three years and, where the proceeds of the sale are reinvested, these can be used to defer capital gains.
- Seed Enterprise Investment Scheme (SEIS)
Tax relief is available at a higher rate of 50% on an investment of up to £100,000 into qualifying trading companies younger than two years old. Exemption from CGT is also available after three years on qualifying shares.
- Venture Capital Trusts (VCTs)
A VCT is a company whose shares are traded on a regulated market. In other words, the shares must be quoted on the UK Stock Exchange or an appropriate European exchange. Up to £60,000 of tax relief can be obtained via the 30% tax reducer available for investments in VCTs. Dividends received on the first £200,000 of VCT investments are exempt from income tax.
Capital gains tax (CGT)
- Use it or lose it – The Annual Exemption (AE)
The AE for 2019/20 is £12,000 and unlike the PA, this is not reduced for those with high incomes. Both spouses are entitled to an AE which can be utilised by tax-free inter-spouse transfers. To ensure the 2019/20 AE is not wasted, consideration should be given, where appropriate, to selling or gifting assets standing at a gain.
- Loss utilisation
If both spouses’ AE has been exhausted and chargeable gains have arisen, it may be worth identifying assets standing at loss which can be sold to crystallise the loss and mitigate CGT. The asset can be repurchased in the new tax year; if repurchasing shares, however, this must take place 30 days after the disposal to be effective. Alternatively, it may be possible to make a “negligible value” claim for assets which have lost their value.
- Unutilised basic-rate band
CGT is generally payable at 18% if, after considering all income sources, there is unused basic-rate band (up to £50,000 for 2019/20), and at 28% thereafter. It may be prudent to structure disposals so that the lower rate available to a basic rate taxpayer can be utilised.
- Entrepreneurs’ Relief (ER)
ER is available in respect of gains made on the disposal of all or part of a trading business; this includes a shareholding of greater than 5% in a trading company in which the shareholder is an employee. The relief reduces the applicable rate to 10%. The limit for total gains which can qualify for this reduced rate was reduced in the Budget from £10m to £1m for disposals made on or after 11 March 2020. There are specific rules to determine the treatment of transactions entered, but not completed, before 11 March 2020. ER can provide a substantial saving, and individuals should consider whether their current business interests may qualify for relief on a future disposal.
- Private Principal Residence (PPR) relief and lettings relief
A property used as the only PPR throughout the period of ownership is exempt from CGT. Where there are periods in which a property is not used as the sole PPR, there may be a taxable gain on disposal. There are specific rules determining whether some of the period when a property is not used as the PPR can qualify for PPR relief. These are known as periods of “deemed occupation”. One period currently qualifying as a period of “deemed occupation” is the last 18 months of ownership (as long as the property has been used as the PPR at some point). From 6 April 2020, this period of deemed occupation will be restricted to nine months, which may cause an unexpected CGT liability.
Lettings relief can currently be claimed on a PPR for periods when it is rented. This relief can exempt up to £80,000 of a gain for jointly held properties. From 6 April 2020, lettings relief will not be available unless the owner of the property is sharing occupation of their home with the tenant.
Inheritance tax (IHT)
- Lifetime giving and a tax-efficient will
IHT applies to taxable estates exceeding £325,000 (including gifts in the seven years before death).
Where the main residence is left to a direct descendant, including children and grandchildren, the Residence Nil-Rate Band can increase the tax-free allowance to £475,000. However. this additional relief is abated for estates exceeding £2 million.
Lifetime gifts can become exempt from IHT after seven years and this can be a straightforward method of reducing the value of an estate. It is essential, however, to consider future income requirements before making such gifts.
Dying intestate can cause unexpected IHT results and delays in grant of probate. A tax-efficient Will can ensure there are no IHT shocks for the beneficiaries. Messrs. Hoare Trustees is available to discuss and take Will instructions for C. Hoare & Co. customers.
- Reliefs and exemptions
Where appropriate, a number of reliefs and exemptions can be utilised to mitigate IHT:
- Everyone can make gifts of £3,000 each tax year. Any unused amount can be carried forward for one tax year.
- Small gifts of £250 or less per recipient in each tax year are exempt.
- Gifts to charities and to most mainstream political parties are generally exempt from IHT.
- Transfer between spouses and civil partners of the same domicile are exempt.
- Certain marriage gifts can be exempt from IHT. For example, a gift of £5,000 from a parent to their child, £2,500 from a grandparent, or £1,000 from anyone else can be made free of IHT.
- Regular gifts out of excess income may be exempt if strict conditions are met. Advice should be taken to ensure the gifts fall within the relief provisions and that appropriate evidence is held.