With the tax year end just a few weeks away, it’s important to put some time aside to consider any planning opportunities in respect of your personal tax position. Below, we discuss just a few of the opportunities to consider.
The starting point when considering Income Tax planning is to determine where your total annual income is likely to fall in relation to the various tax thresholds.
For the current tax year (2018/19) you have a tax free personal allowance of £11,850.
The next £34,500 is taxed at 20%, followed by a 40% higher tax rate for income up to £150,000.
Any taxable income received over and above this is taxed at the additional rate of 45%. An important point to note is that the personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. Consequently, if your income exceeds £123,700 for the year ended 5th April 2019, you will lose your personal allowance in full.
This means that income falling between £100,000 and £123,700 is taxed at an effective rate of 60%!
But if you plan carefully, there are helpful steps to take. Individuals with income falling near these thresholds can reduce their exposure to income tax in a number of ways. For instance:-
Pension contributions – making a pension contribution will not only reduce your income for the purposes of the personal allowance reduction (as discussed above) but it will also extend the lower tax thresholds and consequently ensure that more of your income is taxed at the lower rates of tax. There are, however, a number of limits that apply to pension contributions and financial advice should be sought in advance of any transaction.
Gift Aid donations – any donations made to charity will also ensure that more of your income is outside the higher rate tax net.
Tax favoured investments – you may wish to consider investing in shares that qualify for Enterprise Investment Scheme (EIS) or Seed EIS (SEIS) relief. Under the government incentivised schemes your tax liability for the year may be reduced by up to 50% of the sum invested. In addition, the investments also qualify for a number of capital gains tax reliefs and exemptions.
Venture Capital Trusts are another tax incentivised investment that benefit from income tax relief on the initial investment, as well as a capital gains tax (CGT) exemption on the shares themselves. In addition, dividends received from VCT shares are income tax free.
Looking to the next tax year, you may wish to consider transferring income yielding assets to a spouse of civil partner in order to fully utilise all relevant allowances and lower rate tax thresholds.
Given the increased restriction in loan interest relief from 6th April 2019, Buy-to-let investors should consider tax planning opportunities as soon as possible. This could involve paying down debt, refinancing or, in some situations and subject to specific advice, incorporation may be desirable. Professional financial advice should support any investment and pension tax planning.
CAPITAL GAINS TAX (CGT)
The Annual Exemption for 2018/19 is £11,700.
This allows individuals to sell capital assets and make capital gains up to this amount without becoming liable to a tax charge. However, it is important to note that this is a ‘use it or lose it’ allowance and cannot be carried forward to future years.
Therefore, subject to personal circumstances, you may wish to consider what gains can be crystallised each year to the extent of your Annual Exemption. Here are some other Capital Gains Tax planning points you may wish to consider:-
– Married couples or civil partners may wish to review how assets are owned between them. The transfer of assets between married couples and civil partners is done on a no gain no loss basis. Therefore, full utilisation of each partners Annual Exemption should be an important factor when reviewing asset splits.
– If you are selling a property that you have, at some point, lived in, you may be able to claim both a principal private residence exemption and a letting exemption to reduce the amount that you have to pay.
– Capital losses from a previous tax year can be offset against gains made in future years. However, a formal claim must be submitted to HMRC within 4 years of the end of the tax year in order to ‘bank’ this loss before it is time barred. Therefore, claims in respect of 2014/15 losses must be made by 5th April 2019.
– Entrepreneurs relief (ER) is potentially available on certain trading businesses, assets or shares that meet the qualifying conditions. The effect of the relief is that capital gains tax (CGT) is only payable at a rate of 10% as opposed to the higher rates of 20% – or where residential property is concerned, 28%. The ER rules can inadvertently be broken and therefore it is important that you seek advice as soon as possible in respect of any future capital disposals.
– If you have permanently separated from your spouse during the current tax year, it is important that you consider the split of assets before 5th April 2019. This is because assets can pass between you and your spouse tax free in the year of permanent separation but transfers taking place in the new tax year may attract a charge to capital gains tax.
This blog covers just a fraction of the many tax planning opportunities to consider on an annual basis and it is important that you put time aside to discuss any relevant points with your expert tax advisor and accountant.
Cheshire Accountants Afford Bond have offices in Nantwich and Wilmslow and a team of fully qualified tax experts and accountants available to help you – for further information, please contact our Tax Director Chris.Regnauld@affordbond.com or complete the Contact Us form here on our website.