With the end of the 2019/2020 tax year fast approaching, it is time to consider different financial planning opportunities that may help to reduce your overall tax liability. Below, we have highlighted some key tax-planning opportunities available and what you can do to ensure you are maximising allowances and reliefs before the 5 April.
Maximising Personal Allowances
The Personal Allowance (PA) gives you the opportunity to reduce the amount of income on which you pay tax. For this tax year, the Personal Allowance is £12,500 which means you are entitled to receive £12,500 in earned income before you are required to pay any tax. This is progressively withdrawn for anyone earning more than £100,000. As the end of the tax year approaches, it is sensible to try to reduce your taxable income below £150,000 to avoid the 45% tax bracket – pension contributions and gift aid contributions are a few ways to help reduce this.
If you find yourself married or in a civil partnership, you may be eligible for the Marriage Allowance which ensures that both personal allowances are fully utilised. This is a tax perk that allows one partner to transfer 10% of their personal allowance to their spouse. It means £1,250 can be transferred in 2019/20, which could help to reduce a couple’s tax liability by up to £250 in the tax year. This allowance is only available to couples where one earns no more than £12,500 per annum, and where neither pay tax at the higher or additional rate. It is also important to note that you can backdate your claim for up to four years so it may actually mean that you are currently missing out on more than a £250 tax saving. If you would like guidance on this matter, please get in contact.
The Dividend Allowance offers some tax saving on the first £2,000 of dividend income earned each year. It is important to note that this is in addition to your personal allowance meaning that you do not pay tax on any dividend income that falls within your PA of £12,500.
If you are a business owner and have not yet utilised your dividend income, you may find it beneficial to pay yourself a tax-free income of £2,000 in the form of a dividend in order to reap the benefits of this allowance.
Utilising an ISA
Individual Savings Accounts (ISAs)
For many individuals, ISAs are an attractive and tax-free way to save. They allow you to invest in any combination of cash, stocks or shares up to the 2019/20 limit of £20,000. The most attractive element of the ISA wrapper is that you are not required to pay tax on the growth, return or interest received from your investments and therefore, fully utilising this allowance maximises your potential for tax-free investments.
It is important to note that you are unable to carry forward part of your ISA allowance to the next year and so, if you do not fully utilise your ISA allowance before 5April, your spare allowance for this year will be lost.
There are other ISAs available such as the Junior ISA or Lifetime ISA which also offer tax-free benefits. Junior ISAs are tax-free saving accounts for children and can be opened and managed by a child’s parent or legal guardian. Money in the account belongs to the child but they will not be able to access the funds until they turn 18 years of age. Junior ISAs come with the same above tax benefits as a standard ISA but instead presents a lower allowance of £4,368.
A Lifetime ISA (LISA) can be used if you are looking to save for a home, retirement or both. It allows you to contribute an amount of £4,000 each year and in addition, the government will add 25% to the money invested. It is key to remember that the Lifetime ISA limit counts towards your annual ISA limit and therefore, if you contribute £4,000 into a LISA you will only have £16,000 left to contribute into an annual ISA.
Inheritance Tax Opportunities
Often labelled as Britain’s “Most Hated Tax”, it is important to understand the potential tax planning opportunities to reduce your Inheritance Tax (IHT) bill as much as possible.
Gifting is the first tax-efficient way of potentially reducing the value of your estate for IHT purposes. Every individual has an annual exemption of £3,000 each year that they can gift on an IHT-free basis. Any unused annual exemption can be carried forward for one year and therefore, the limit may increase to £6,000 if you your annual allowance for 2018/19 has not been used. You can also give as many gifts of up to £250 per person as you want during the tax year providing you have not used another exemption on the same person.
If you do choose to gift, you will need to survive seven years after making the transaction for it to fall outside your estate and therefore be exempt from IHT. If you die during that seven-year period, IHT of 40% is due unless you survive by more than three years by which the IHT rate then falls by 20% each year.
Moreover, if you find that you have already used the above allowances and are still concerned over your IHT tax-bill then there may be other options. There is potential for IHT reduction from moving some assets into a trust or the use of Business Property Relief (BRP). If these are something that may be of interest to you, please get in contact.
Capital Gains Tax Allowance
Each individual has a CGT allowance of £12,000 for the 2019/20 tax year. This allowance cannot be carried forward or transferred, so aim to make disposals before 5 April to utilise this year’s exemption. A transfer between spouses is currently exempt from CGT and so, you may find it sensible to transfer assets to a spouse or civil partner so both CGT allowances get fully utilised.
If your annual allowance has already been maximised, you may find it an appropriate time to make use of any losses over the year and offset these against the gains. Selling assets at a loss if your overall gain in the tax year exceeds the annual allowance will reduce the gain that is subject to tax.
If you still find yourself exceeding your CGT annual allowance but have not yet maximised your ISA allowance, you may also look to invest in a Bed and ISA. This involves selling assets to realise a capital gain and then immediately buying back the same assets inside an ISA. Please contact us if you want to find out more information on this.
Maximising your pension contributions
Contributions to your pension attract tax relief at your marginal rate of tax. The annual allowance that can be paid into your pension each year, whilst still receiving this tax relief, is currently capped at £40,000. However, if you are affected by the tapered annual allowance, this figure may be capped at £10,000. The tapered annual allowance is triggered if your threshold income is over £110,000 and your net adjusted income is above £150,000. If both limits are exceeded, your pension allowance will be tapered away by £1 for every £2 of adjusted income over this level until the minimum annual allowance level of £10,000 is reached. If you find yourself impacted by the taper and would like to discuss potential solutions, please get in contact.
If you have already maximised this years’ annual allowance, you may be able to carry forward some unused allowance from the last three years. This allows you to make pension contributions in excess of the annual allowance and receive further tax relief. However, you should stay mindful of the lifetime allowance which is currently set at £1,055,000. Any pension value that goes beyond this amount will then be subject to tax, which could greatly impact your overall financial position.
Furthermore, you may also consider making contributions of up to £3,600 into a pension scheme for a spouse, civil partner or child if they have no earnings of their own, to obtain basic rate tax relief on the contributions.
Other Tax Efficient Investments
If you are looking at further ways to reduce your tax liability, you may consider investing into a Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS).
Venture Capital Trusts
This product is a collective investment that invests in various small start-up ventures. Below are the tax reliefs for this type of investment:
– Income tax relief is 30% on a maximum investment of £200,000 per tax year. This is claimed back if you sell your shares within five years unless you sell them to your spouse, or you die
– No CGT payable on gains in respect of investments made in a VCT and there is no minimum holding period for this rule to apply
It is important to note that VCT’s do not offer any relief on inheritance tax.
Enterprise Investment Scheme
By investing into an EIS, which invests mainly in small, private companies, you will be eligible for the below tax reliefs:
– Income tax relief at 30% on amounts invested up to £1 million, provided the shares are held for at least three years. To put this into perspective, a £100,000 investment could provide a £30,000 saving on that year’s income tax bill.
– No CGT payable on gains in respect of investments made in an EIS, where the investments have been held over three years.
– CGT on gains realised from other investments, such as selling a second home, can be deferred if they chose to invest the proceeds into an EIS. To receive this CGT relief, you must invest into EIS shares during the period 1 year before or 3 years after selling the asset that generated the gain.
– Investments in an EIS will also qualify for Business Relief for IHT purposes, meaning that you will benefit from 100% relief from Inheritance Tax, provided the investment is held for over two years.
– Gives the ability to offset a loss made on an EIS company against either your capital gains tax bill or your income tax bill
Seed Enterprise Investment Scheme
A SEIS, which invests in small, early-stage companies, offers similar tax reliefs to the EIS but the noticeable tax-relief differences are:
– Income tax relief at 50% on investments up to £100,000 per tax year, provided the shares are also held for at least three years.
– Instead of deferring the capital gains like in an EIS, investors can benefit from Reinvestment Relief at 50% of the gain realised from the sold asset which does not become repayable at any time in the future.
It is important to remember that the investments within these schemes are in small, unquoted companies and should be considered as high risk and only a small part of an overall portfolio. Due to the illiquid nature of the investments held within these types of portfolios, there is potential for partial or total loss of capital. It is also important to note that often there will be no regulatory oversight and investors will usually not be eligible for compensation if things go wrong. You should always consider seeking independent investment advice before making such an investment.
If you would like to discuss how FPWM might be able to help you with your tax-planning before the end of the tax year, please get in touch.
Please note: This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, nor can anything stated be considered a personal recommendation