With the end of the tax year fast approaching, now is the time to think about whether anything can be done to minimise your tax burden.
Budget day is 11 March. We don’t know yet what will be in it, but it is worth considering the following before it is too late.
For business owners, this might be drawing dividends to make use of your tax bands. It might be making pension contributions to make use of brought forward annual allowances or to preserve your personal allowance.
If you are planning on selling a property that has been your main residence for a part but not all your ownership, now would be the time since the rules are changing on 6 April 2020.
DIVIDENDS
For the year ended 5 April 2020 the dividend allowance, on which dividends are tax free is £2,000. For dividends above this, basic rate taxpayers will have a 7.5% tax liability, higher rate 32.5% and additional higher rate taxpayers 38.1%. Taxpayers with income above £100,000, will lose £1 of their personal allowance for every £2 of income above £100,000 so the effective rate on dividends shoots up between £100,000 and £123,700 for 2019/20.
For business owners, it may be more tax efficient to take dividends before 5 April 2020. Please call us before 5 April 2020 to discuss your situation.
PENSION CONTRIBUTIONS
Reviewing your pension contributions should form part of your end of year planning, whether it’s to make use of your annual allowances and those unused from earlier years (2016/17 onwards) or to preserve your personal allowance when your income is over £100,000. The maximum that can be held as a Lifetime Allowance is currently £1,055,000.
The annual allowance remains at £40,000 for those with income below £150,000. Whether or not you are earning, any UK resident under 75 can contribute up to £2,880 into a stakeholder pension each year. HMRC will add an additional 20% to make it £3,600.
CAPITAL GAINS TAX
All UK tax residents are entitled to an annual CGT exempt amount which for 2019/20 is £12,000. This is especially useful for those with readily realisable assets such as shares. Please note that if you buy back the shares within 30 days, anti-avoidance rules will kick in. However, these will not apply if another person such as a spouse acquires the shares. Inter-spouse transfers or gifts of assets remain free of CGT. Married couples can therefore look to maximise their combined allowances of £24,000.
The buy back rules do not apply if you are moving your investments into an ISA tax wrapper (see below). This tax planning is sometimes called “Bed and ISA” and is an effective way of using your CGT annual exemption and ISA allowance.
Now might be a good time to consider whether any assets or investments have fallen in value and are now worthless. This may include a loan to a UK business which is now irrecoverable. If the loss relates to shares in an unquoted company that carried on a trade, it may be possible to offset the loss and reduce your income tax liability.
INHERITANCE TAX
The annual gift exemption of up to £3,000 can be used in each tax year. If unused, the allowance can be carried forward one year, so if you did not make gifts last year, you may consider making gifts of £6,000 before the end of the tax year. ‘Gifts out of income’ is still a further valuable exemption and records should be kept if you wish to make use of these exemptions. Please contact us so that we can advise what records should be kept and the format they should be in to ensure that they comply.
The nil rate band currently remains frozen at £325,000. Wills should be regularly reviewed to take advantage of the new residence nil rate band which was introduced from 6 April 2017.
Parents and grandparents can also pay into a Lifetime ISA opened by their adult children or grandchildren (i.e. aged 18 or over), which could be a useful part of inheritance tax planning.
ISAs
Individual Savings Accounts (ISAs) are savings accounts that are completely free of tax on both the income and capital growth. There is no lock-in period, minimum subscription or lifetime limit. The maximum contribution for 2019/20 remains £20,000. The limit for a Lifetime ISA is currently £4,000 and there is an additional allowance of £4,368 that can be placed by parents into a junior ISA for children, there is also a Child Trust Fund into which you can place £4,260.
ENTERPRISE INVESTMENTS SCHEME (EIS), SEED ENTERPRISE INVESTMENT SCHEME (SEIS) and VENTURE CAPITAL TRUSTS (VCTs)
The EIS, SEIS and VCT reliefs were introduced to provide incentives to investors to invest in small unquoted companies, which are generally perceived to be higher-risk investments. The main incentive is income tax relief but there are also other valuable tax reliefs including CGT deferral relief, loss relief on disposal, CGT exemption and IHT relief where conditions are met.
ANNUAL PROPERTY OR TRADING ALLOWANCE
From 6 April 2017, you can get up to £1,000 a year in tax-free allowances for gross property or trading income. If you have both types of income, you’ll get a £1,000 allowance for each. If you are in receipt of such income then you should consider claiming the allowance. Gross income means the total amount you get before any allowances or expenses. Please note that you can’t deduct any other expenses or allowances if you claim this allowance.
If any of the above are of interest to you, please call us on 0207 384 2647