Year end tax planning tipsPosted 2020 by Chris Davies
As we approach the tax year end our Tax Manager Josh Pearce shares his thoughts on what to do to ensure you are tax optimal!
Accountants and Financial Advisers alike provide their hints and tips to their clients on how best to maximise their wealth through a variety of strategies which include investment, tax-efficient saving, business restructuring and generally ensuring you have all your ‘T’s’ crossed and ‘I’’s dotted.
Have you taken the necessary steps? Some useful points follow:
ISA’s – don’t forget to use your ISA allowances. The maximum that can be invested each tax year is £20,000.
LISA’s – why not open a LISA and get a 25% Government credit. Invest £4,000 and they will give you £1,000 for free. You can use these to buy your first home or save for retirement. Withdrawing early incurs a 25% penalty. You can invest if you are aged 18-40 years.
Junior ISA’s – don’t forget your childrens’ allowances. £4,260 can be invested on behalf someone aged 18 and under.
Personal allowance – The personal allowance of £12,500 is progressively withdrawn for individuals earning more than £100,0000, leading to a marginal tax rate of 60% on income between £100,000 and £125,000. The threshold at which the personal allowance is withdrawn can be increased by making pension contributions or qualifying charitable donations (see below).
Pension Contributions – you can invest up to £40,000 (gross) per year (subject to earnings levels), with a potential carry forward for up to three years of unused allowances. If you have had a pension and now wish to contribute a lump sum, you could therefore invest £160,000 before the end of the tax year! But you best take advice to make sure it’s the right thing to do. If your income is greater than £150,000 then you may be caught by ‘tapering’ of tax relief, so it is best to check with someone suitably qualified before taking any action. Smaller contributions of up to £3,600 (gross) can be paid by or on behalf of those who do not have relevant earnings.
Gifts to charities – Charitable donations made under the gift aid scheme offer benefits for both the donor and the charity. A cash gift of £80 will result in a £20 uplift for the charity so the total donation would be £100. The donor receives tax relief of £20 for higher rate taxpayers, the cost of making a £100 donation is only £60. The effective cost for additional rate taxpayers or those earning between £100,000 and £125,000 is even less!
SEIS – Seed Enterprise Investment Scheme investments offer tax breaks. A 50% tax reducer; growth capital gains tax free, loss relief and potential inheritance tax relief on investments up to £200,000 may be of interest. These are fledgling companies and so with the tax breaks come risks.
EIS – Enterprise Investment Scheme investments offer tax breaks. A 30% tax reducer; growth capital gains tax free, loss relief and inheritance tax relief are all on offer if these are of interest to you. You can also defer other capital gains to the extent you invest in EIS investments. The maximum permitted investment eligible for relief, per tax year, is £1,000,000. You must keep the shares for more than three years to qualify and failure to do so results in a claw back of relief.
VCT – Venture Capital Trusts are like EIS in concept. They are smaller, riskier companies seeking growth investment. With a VCT your money is pooled with other investors. You get the same 30% tax reducer if you buy new shares but must keep them for five years. Dividends paid by VCT’s are tax-free. The maximum permitted VCT investment eligible for relief, per tax year, is £200,000. You don’t pay capital gains tax on the sale of VCT shares (provided the Company remains a VCT company).
Income-splitting – your spouse or civil partner may earn more, or less, than you. Think about how you can equalise income and/or use each other’s allowances and basic tax rate bands. Speak to us if you want advice on this.
Rent-a-room Relief – renting a home in your house can be done tax free, where the rent is less than £7,500. Over that amount you only pay income tax on the excess! New rules have been introduced to counter absenteeism from a main residence, where rent-a-room relief is being claimed. A married couple or civil partnership have only one limit between them.
Capital gains – sell, sell, sell. If you hold assets standing at a gain, you can make those gains tax-free if they are below the annual exemption of £12,000 per person. You could even buy the asset back (shares for example) after 30-days- don’t get caught by bed-and-breakfasting rules! If you have a spouse or civil partner, then you might transfer assets between you to maximise allowances*. This can even work with children in some circumstances.
(*Beware where the transfer is a land transaction as Stamp Duty Land Tax could be payable- speak to us if you are considering this)
‘Bed and ISA’ – Sell investments standing at a gain (within your annual exemption) and repurchase them in your ISA to make use of your ISA allowance and enjoy the future growth tax-free. Equally, crystallise capital losses by selling shares standing at a loss and repurchase in an ISA. Always check with a qualified financial advisor before undertaking any such transactions.
Inheritance tax – if this is an issue for you, then consider using your annual exemption for gifts of £3,000. If you haven’t used last year’s you can use that too, making a total of £6,000 out of your potential estate immediately (and that alone saves £2,400!). It’s also possible for parents to make gifts in consideration of marriage of £5,000, grandparents the same but for £2,500 and if you are not a relative then up to £1,000 to any other person. There is a small gifts exemption of £250 which can be made to any number of people if another exemption has not been used on them. Normal expenditure out of income is immediately exempt if you can show gifts do not impact on your day-to-day living standards.
Nil Rate Bands- reconsider your Will and who assets are being left to and in what form. Careful planning on this topic is often at the back of people’s minds and sadly it is not unknown for planning to be left until it is either too late, or it is not done at all with unnecessary tax loss then incurred by those left behind.
Businesses – you should think about structure. Perhaps incorporating a sole trade is the way to go and will save on tax and national insurance. This needs careful planning as there are lots of other considerations to make when incorporating your business.
Businesses – consider the timing and reliefs available for large capital expenditure and whether reinvestment of sale proceeds offers opportunities for tax deferral. Using the annual investment allowance of up to £1m** to buy plant & machinery for your business achieves a 100% write-off in year one, saving up to £190,000 in company taxes.
(**The £1m allowance applies until 31 December 2020 and is adjusted where an accounting period crosses that date. From 1 January 2021 the allowance will revert to £200,000. This requires careful consideration).
Exit Planning – if you are seeking to exit a business, you should consider when is the right time for you to do so and what form an exit from the business might look like. We have lots of ideas and solutions for anyone looking to do this and the best thing to do is to speak to us, so we can offer tailored advice.
Hopefully that’s a good spread to whet your appetite and if there is anything we can help with then contact us for more information.
None of the foregoing constitutes advice. Individual circumstances differ and if you are planning on any of the above then you should seek the advice of a properly qualified professional who will be able to advise you whether your plans are suitable in your own circumstances.