Aspects of your financial position you could consider reviewing before 6 April 2017
Review your capital gains and losses
Each year most taxpayers paying tax on the ‘arising’ basis will have a tax free Annual Exemption for capital gains tax purposes (£11,100 for 2016/17). If the exemption is not used it is lost – it cannot be carried forward to future years. If you have assets standing at a gain and are considering selling them, you should consider how best to make use of this allowance. For example if you had shares at a gain of £22,200 you could sell half this tax year and half after 5 April meaning that you would not pay any capital gains tax if you have no other gains in these two years.
Married couples can consider using the capital gains tax exemption of both parties since assets transfer between spouses at original cost rather than at market value. If assets are standing at a gain of £44,400, each spouse could hold half of the asset and then sell half of their share before and half after the end of the tax year and avoid any capital gains tax liability providing the proceeds are also retained by each individual or in joint ownership.
If you have sold assets realising a gain of more than the annual exemption this year, and have assets currently standing at a loss that you are considering selling then you could sell these assets before the tax year end to bring the overall gain down to the annual exemption figure. Beware though of the anti-avoidance rule if you re-purchase the same shares within 30 days of disposal. In this case the loss realised on the disposal is disallowed.
Review your dividends
The rules for taxing dividends changed on 6 April 2016, with the first £5,000 of dividends being free of tax in the UK (although this tax free allowance is being reduced to £2,000 from 6 April 2018). After this tax free amount, the rates at which dividends are taxed are 7.5%, 32.5% and 38.1% with the rates taking effect at the same bands as for other income. Different rules apply for remittance basis tax payers.
For many individuals with relatively low dividend income they will have benefitted from the new rules. However, taxpayers running their business through a company will need to consider the right amount of dividends to declare by the end of the tax year. We can assist in calculating the likely tax impact of declaring dividends, and the most efficient way of taking profit from the company.
Review your pension contributions
You can contribute up to 100% of your relevant earnings (broadly speaking this is your employment / self-employment income) to a pension scheme. However, tax relief is only given for up to £40,000 of contributions. The pension rules are complex, and are affected by both the level of your earnings in the current year and how much you have contributed to your pension in the last three tax years. You are also limited on the amount of tax relief you can receive if you have accessed your pension under the flexible draw down rules.
Another area to consider with pensions is whether you would like to contribute to stakeholder pension schemes for younger relatives (children, grandchildren etc.). As pensions enjoy tax free growth, starting a pension for someone when they are young will give the fund an extra 25 years to accumulate compared with when pension funds are usually set up by individuals for themselves after they have started working.
If you would like further advice on maximising the tax relief for pension contributions, please let us know. We work closely with a number of financial advisers in this area.
Review your charitable donations
Individuals who are higher or additional rate taxpayers can receive tax relief on charitable donations. Basic rate relief is given by deduction at source at a rate of 20%. Higher rate taxpayers receive an additional 20% relief and additional rate taxpayers receive an additional 25% relief. If your income for the 2016/17 tax year is likely to be in the £100k – £120k band, your marginal rate of tax will be 60% because of the restriction of your personal allowance. If this applies to you, it may be worth making a Gift Aid contribution equating to the difference between £100k and your income. This will give you effective relief at 60% and your money will be used by the organisation of your choice rather than central Government!
Review your ISA investments
The ISA allowance for 2016/17 for those over 18 is £15,240. You can invest up to this amount in the year, and any interest, dividends or capital gains are free of UK tax. From April 2017 you can invest £20,000 into ISAs during the year, and individuals between 18 and 40 have the option of investing up to £4,000 of this amount into a new ‘lifetime ISA’ where you receive a bonus of 25%. Note that ISAs are generally only available to UK resident individuals.
The 2016/17 ISA allowance for those under 18 (the Junior ISA) is £4,080. If a parent was to invest in an ordinary savings account for their child and the account generated more than £100 of income, the income would be taxable on the parent. However, since ISA income is not taxed, this is not relevant. It is also a useful tool for parents / grandparents to pass on wealth to their children and avoid inheritance tax at 40%.
Review tax efficient investments on offer
There are investments you could consider that offer tax incentives for investors. These tend to be investments into higher risk startup companies so the investment is not for everyone (depending on risk appetite). However, there are tax reliefs for investments into Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT). Tax relief comes in the form of a tax reducer on investment into the company, and if you hold the shares for at least three years the gain on disposal is free of UK tax.
There are differences in the treatment of EIS and VCT investments. One of the main differences is that EIS investments will also qualify for 100% business property relief once the asset has been held for two years and will therefore not be charged to inheritance tax at 40%.
Review your Estate Planning
It is also worth reviewing your estate for UK inheritance tax purposes (although this is not time sensitive for the end of the tax year). The current Nil Rate Band is £325,000, and from 6 April there will also be a £100,000 Residential Nil Rate Band when a property is passed to your offspring. With a married couple qualifying for both of these allowances, it gives a maximum tax relief of £850,000 with anything above that amount being taxed at 40%. There are various options available to reduce your taxable estate, and we would be happy to help you with any planning you would like to undertake in this regard. If you already have an investment portfolio, one option is to consider whether you would like to invest in AIM listed shares. These tend to be smaller companies so are slightly higher risk than public companies listed on the stock exchange, but with a diverse portfolio the risk can be spread. The advantage of AIM listed shares is that once you have owned the shares for two years, they do not form part of your estate for UK inheritance tax purposes (also see above regarding EIS investments)
Review the changes to how Rental Properties are taxed
By way of reminder, from 6 April 2016 the Government got rid of the 10% wear and tear allowance for furnished properties. For the current tax year you will therefore need to keep a record of any expenses you have incurred in replacing soft furnishings for your rental property (for example sofa, bed, carpets etc.) since you can only claim for actual expenses incurred rather than claiming a flat rate of 10%.
In addition, individuals with mortgage interest on their rental properties will see a change to the way they obtain relief for mortgage interest paid. Rather than taking a deduction against rent for the mortgage interest, this will be multiplied by 20% and a deduction of the calculated amount taken against the tax liability. The effect of this is that basic rate taxpayers will not see an increase in their tax liability, but higher and additional rate taxpayers will only get mortgage interest relief at 20% rather than 40% or 45%, so their overall liability will increase. This change will be phased in over the next four tax years.
Please let us know if you would like any further information or advice by contacting us using the details below:
Mark Howard: mark.howard@charter-tax.com
Kiran Dhanoya: kiran.dhanoya@charter-tax.com
Lauren Thomas: lauren.thomas@charter-tax.com
Nicola King: Nicola.king@charter-tax.com
Disclaimer
The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and information contained herein is provided based on legislation as at 1 March 2017.
Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law. We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.
