As the 5 April approaches, it is important that you take the time to ensure that your tax position is optimised, where possible.
With this in mind, we set out below some planning points for you.
There are a vast array of marginal rates of Income Tax which can apply depending upon personal circumstances, and it is important to try, where possible, to ensure that your income does not fall within one of the higher marginal rates. In particular:
- You should ensure that your own and your spouse’s personal allowances are fully utilised.
- Each individual is currently entitled to receive dividends of up to £5,000 without paying further tax and so this should be utilised where possible, and portfolios should be equalised between spouses to ensure that this relief is taken advantage of.
- Entitlement to full child benefit relief is only available where neither spouse earn more than £50,000. Again it is beneficial to ensure that income is equalised where possible to avoid losing this benefit.
- Personal allowances are tapered away once an individual’s income exceeds £100,000. Ensuring that income is equalised where possible, or that reliefs are claimed such as for pension contributions and charitable donations may result in up to an effective 60% rate of tax relief being obtained.
- From 6 April 2016, the annual pension allowance of £40,000 is tapered for those earning over £150,000, such that where income exceeds £210,000, contributions are capped at a maximum of £10,000 per annum.
- However in addition to the annual allowance, taxpayers are entitled to carry forward unused relief for up to three years, meaning that a contribution made before 5 April 2017 can utilise unused relief from the tax years 2013/14 onwards. For 2013/14 the relief was £50,000 and for 2014/15 and 2015/16 the relief is reduced to £40,000. Substantial contributions can possibly still be made prior to 5 April 2017 even for individuals who are significant income earners.
- Donations to charities can usefully reduce Income Tax liabilities arising. In addition to cash donations under the gift aid scheme, it is also possible to donate land and quoted shares and obtain full relief on the value of the asset donated. This is particularly helpful where assets are standing at a substantial gain, which would be washed out on such a gift.
- Subscriptions for shares qualifying for Enterprise Investment Scheme and Seed Enterprise Investment Scheme reliefs can help reduce a liability to Income Tax and help defer Capital Gains Tax. Qualifying subscriptions can be carried back up to one tax year.
- The rules for the deductibility of interest paid on loans taken out to acquire residential property is changing from 6 April 2017. From 2017/18, a proportion of the interest will no longer be deductible against the net rents, with it being replaced by an Income Tax credit. This will inevitably lead to higher taxable income arising, which may well have a knock-on effect to the rates of tax applicable to that income as mentioned above. In order to reduce the impact of this change, you may wish to consider whether buy to let type loans can be replaced with loans which may qualify for full Income Tax relief. Examples would be loans to fund trading businesses and/or commercial property.
CAPITAL GAINS TAX
- You should ensure where possible, your annual exemptions are used up for the year. Whilst there are matching rules that negate the ability to bed and breakfast shares, you can consider disposing of assets standing at a gain and reinvesting in similar shares in the name of your spouse or indeed into an ISA or pension fund.
- Where you have already utilised your Capital Gains Tax annual exemption you may wish to consider, where commercially sensible, deferring realising gains until after 5 April 2017, thereby postponing by a year the date on which the Capital Gains Tax would become payable.
- It may be possible to reduce your Capital Gains Tax liability by realising losses on the sale of asset but here, bear in mind that where the sale is to a connected person, the loss may be restricted, and furthermore, there is a targeted anti-avoidance rule which prevents taxpayers from artificially creating tax allowable capital losses. Disposals which are undertaken as part of a sensible commercial strategy will not be within the targeted anti avoidance rule.
- Enterprise Investment Scheme and Seed Enterprise Investment Scheme investments also qualify for Capital Gains Tax reliefs and deferrals if the investments are made within a suitable period of time. This may be particularly useful if the gain being deferred is one which will otherwise be bought in the scope of 28% Capital Gains Tax (perhaps for a gain that was made in 2015/16 or before) as on a sale of the EIS shares, the gain may come back into charge at a lower Capital Gains Tax rate. However it should be borne in mind that such investments are inherently risky and you should take proper investment advice before proceeding with such investments.
- You should look to take advantage of your annual gifts relief of £3,000 per annum, which rises to £6,000 if suitable gifts were not made in the previous tax year.
- In addition to the £3,000 gift relief there are reliefs for small gifts of up to £250 per gift and other gifts with can be made on certain occasions.
- Furthermore, regular gifts out of surplus income are not chargeable to Inheritance Tax and so if you find yourself in a position of having regular income in excess of your requirements, you can consider making arrangements to gift away this income on an annual basis.
- From 6 April 2017 we will see the introduction of a new residence nil rate band which will, over time, entitle individuals and their spouses to give away the value of their main residence up to £1m. This is a complicated relief and to fully utilise this it may require certain amendments to be made to your Wills.
- Certain investments may qualify for Business Property Relief which may give a 100% relief from Inheritance Tax after two years of ownership, or even less in some circumstances.
We hope that you will find this a useful summary of actions to consider prior to 5 April 2017 and should you have any queries then please do not hesitate to contact the following:
Darren Hersey – firstname.lastname@example.org
Anthony Rose – email@example.com
Gary Moment – firstname.lastname@example.org