Top eleven tax planning tips for year-end
Good planning and careful timing are critical if you want to maximise tax reliefs or minimise the tax bill on a transaction or investment, and to avoid falling foul of the system of penalties and interest levied by HM Revenue & Customs (HMRC).
With some prior preparation, you could arrange your financial affairs to minimise the impact of tax on you, your family and your business. We have noted below 11 planning tips that need action by 6 April 2016, that may help reduce your tax burden for this tax year. Please note that this is not an exhaustive or detailed list, merely a sample of matters that you should consider.
Beat the tax band
Income over £150,000 per annum is taxed at 45% and, even worse, as you start to lose your personal allowance at £100,000 your income between £100,000 and £121,200 is taxed at an eye watering effective top tax rate of 60%!
To avoid this you can reduce your taxable income to below these income limits.
- Consider making pension contributions or payments to charities, these will reduce your taxable income.
- Consider transferring income yielding assets to your spouse or civil partner who may pay tax at a lower rate or pay no tax at all.
- Self-employed trading losses in your business can be set against current or previous year income to maximise relief. There are some restrictions to this, speak to your HMT adviser.
Plan your dividend income
From 6 April 2016, dividend tax rates increase by 7.5% but there will be a £5,000 ‘tax free’ dividend allowance. If you receive a small level of dividends, you may be better off. However, if you have a large investment portfolio or are a business owner using dividends instead of salary, you may be worse off, so consider the following:
- Keep your dividend income below £5,000 p.a. in 2016/2017
- If you receive large dividends, take advice about bringing forward a dividend and paying it before 5 April 2016 to save tax.
- Combining a low salary with dividends can still achieve significant tax savings for the owner/director.
- Investment in qualifying VCT’s can produce exempt dividends
- Consider offshore bonds to protect the excess dividends from an immediate tax charge as they arise. These bonds can defer the tax until the bond is surrendered when you are a lower rate or non-taxpayer.
Reduce tax on capital gains
- Capital gains tax (“CGT”) is charged at 18% or 28% depending on your other income levels. Consider transferring assets to a spouse or civil partner who may pay tax at the lower rate.
- Ensure you qualify for Entrepreneurs’ Relief on your trading business which reduces your rate of CGT rate down to 10% (lifetime limit of £10 million capital gains). The rules are complex and often planning needs to be in place a year before disposal so talk to us for advice.
- Consider investing in Venture Capital Trusts (VCT), Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS) as these can give tax-free capital gains.
- If you haven’t realised gains up to your annual CGT allowance of £11,100, take a look at whether assets can be sold before 6 April 2016. If you have used up your allowance, consider deferring selling assets until the next tax year.
Build up a tax free fund
- Make full use of the ISA allowance of £15,240 for both 2015/16 & 2016/17
- Transfer private company shares to utilise exemptions and rate bands of your spouse and other family members. But seek advice from HMT of any tax consequences of doing so.
- Realise capital gains annually from your share portfolio within the annual CGT exemption.
- Investing in VCT, EIS or SEIS reduces your income tax bill by up to 50% of the amount invested.
Exchange salary for benefits
- Take advantage of any salary sacrifice arrangements being offered by your employer.
- Employees who sacrifice income to take them below the £100,000 threshold, in return for a tax free pension contribution made by their employer, could save income tax and NIC.
- For employers, there are corporation tax savings on the employer’s pension contributions as well as savings on employer’s NICs, these savings could be used to enhance the pension contribution for the employee.
- Help to Buy ISA for first time buyers allow anyone aged 16 or over, to save up to £200 per month, on top of an initial investment of up to £1,000, towards a deposit on their first property purchase. If an individual saves £12,000, the government will boost those savings by 25% to £15,000 when used for a deposit on the purchase of their first property. The government is giving an incentive of £50 for each £200 saved.
- If you have a second home, and have lived in both, you may be able to save CGT by making an election to nominate which is your main residence.
- If you have moved home and have yet to sell your previous home, if you cannot sell within 18 months the CGT clock will start ticking. Not all of the gain may be taxable so seek advice from HMT.
- From 1 April 2017, higher rate income tax relief for interest paid on borrowings to fund residential property lettings, will be phased out over the course of three years. Holiday lettings are exempt.
- From 1 April 2016, higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of “additional” residential properties (above £40,000), including buy to let properties and second homes. The higher rates will be 3 percentage points above the current stamp duty rates. New rules will be finalised in Budget on 16 March, you may choose to buy before 6 April 2016. Obtain advice from HMT.
Savings & Investments
- There are attractive income tax reliefs (of between 30% and 50%) available for investments in Venture Capital Trusts (VCT), Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS). Individuals can get up to £60,000 income tax relief via a VCT, £50,000 from a SEIS or £300,000 from an EIS.
- The ISA investment limit for 2015/2016 & 2016/17 is £15,240 per annum and you can split the amount you pay in between cash and stocks & shares.
- From 6 April 2016, the first £1,000 of interest income will be tax free (£500 for higher rate taxpayers). Interest will also be paid gross so that non-taxpayers no longer have to reclaim tax deducted at source. Additional rate (45%) tax payers will not benefit from this new allowance.
Planning for a wealthy retirement
- A pension contribution paid before 6 April may reduce both your tax bill for 2015/16 and your payments on account for next year. You receive tax relief for the contributions at your highest marginal tax rate.
- The annual contribution limit for an individual (personal and employer contributions) is £40,000, for each pension input periods (‘PIP’s) ending before 5 April 2016. This year is a one off, you could get benefit from an extra allowance of £40,000, allowing pension contributions of up to £80,000. The rules are complicated so please ask HMT for guidance.
- From 6 April 2016, the contribution limit will be reduced by £1 for every £2 of ‘income’ if you earn over £150,000 in a tax year, until your allowance drops to £10,000.
- If you have made pension contributions below the limit in 2012/13, 2013/14 and 2014/15 then unused relief may be available for carry forward into 2015/16.
Avoid the IHT charge
- You can make gifts up to £3,000 each year free from IHT. You can make as many gifts of up to £250 each as you like to other recipients as well as gifts on marriage.
- Regular gifts that are ‘normal expenditure out of income’ may be made IHT free. Seek advice from HMT before embarking on this plan to ensure those gifts are free from IHT.
- Make IHT free investments. If you own a business or invest in unquoted trading companies, you may be entitled to 100% IHT relief with Business Property Relief (BPR). Investments based on property hardly ever qualify for BPR, so consider changing your portfolio.
- Draw up a will otherwise the intestacy laws may dictate how your assets are distributed to your family without reference to your wishes. A good will should minimise tax and give your family flexibility and protection and may even let them save tax in future.
- If you leave at least 10% of your net estate to charity your executors will only have to pay a reduced rate of IHT of 36% (rather than 40%).
- If you are planning to leave the UK for tax purposes, you will need to plan carefully as giving up UK tax residence is not always straightforward. There are also anti-avoidance rules designed to catch capital gains and some forms of income, if you do not spend five full years non-UK resident. Please do not hesitate to speak to us.
- If you are a non-domicile, you will only benefit from the remittance basis if your unremitted overseas income and gains are less than £2,000 or you make a claim.
- From 2015/16 non-domiciles who use the remittance basis and have been resident for at least 7 of the past 9 years will pay an annual charge of £30,000. The charge on a non-domicile who has been resident for 12 out of 14 years will be increased to £60,000.
- Those resident 17 or more of the last 20 years will pay an annual charge of £90,000 to use the remittance basis in 2015/16 and 2016/17.
- The rules on domicile change from 6 April 2017. Anyone who has been UK-resident for 15 out of the 20 preceding years will be deemed to be UK-domiciled for all tax purposes. If you are not yet UK-domiciled but have been resident here for over 13 years and intend to remain in the UK, you should seek advice. These rules are complicated so do take advice if any of these circumstances are applicable to you.
Build up a tax free fund for children/grandchildren
- Junior Individual Savings Accounts (JISAs) enable parents or grandparents to save up to £4,080 a year, tax-free for each of their children or grandchildren. For children with a Child Trust Fund the same £4,080 limit applies. You can transfer most Child Trust Funds into a JISA.
- A stakeholder pension allows contributions to be made by, or for, all UK residents, including children. You can make a net contribution of up to £2,880 (effectively, £3,600 gross) each year for members of your family, even for those who do not have any earnings.
- Your children or grandchildren may be looking to get on the housing ladder, you could help fund their ‘Help to Buy ISA’.
- Have you maximised your pension contributions?
- Can you make charitable donations now?
- Can you pay dividends now?
- Can you use dividends in place of salary?
- Have you used your full annual CGT exemption for 2015/2016 (£11,100)?
- Can you transfer assets to a lower earning spouse?
- Have you invested in EIS, SEIS or VCT funds?
- Will you qualify for Entrepreneurs’ Relief?
- Have you considered the impact of the new tax rules for Buy-to-Lets?
- Have you used your full ISA allowance of £15,240 for 2015/2016?
- Have you used your full Junior ISA allowance of £4,080 for 2015/2016?
- Have you used your annual IHT exemption (£3,000)?
- Do you have an up to date will?
Talk to your adviser
The above is a brief overview of some of the actions that you can take to minimise your income tax liability. We recommend that professional advice is sought when considering any of the above. Our highly qualified and experienced tax team would be happy to discuss your tax affairs with you.
If you have any questions regarding your tax affairs, please do not hesitate to contact our tax team on 01491 579740.