Tax year end planning tips
Tax planning points to consider before 5 April 2016:
- Your personal allowance is phased out where your income is between £100,000 and £121,200 resulting in an effective rate of tax of 60%. If your income is within this range, consider making pension contributions or charitable donations to reduce the impact of losing your personal allowance.
- If a spouse or civil partner does not have sufficient income to utilise their personal allowance (£10,600 for 2015/16) or their basic rate (20% on income up to £31,785), the higher earning spouse or civil partner may make an outright gift of income producing assets to them. Income from the date of the gift will then be taxed on the recipient spouse.
- Any UK resident individual can contribute up to £2,880 (net) into a pension, irrespective of their earnings, and the pension provider is able to obtain 20% tax relief, so the policy is credited with a gross contribution of £3,600. Therefore, consider contributing to a pension for a non-working spouse/civil partner or children to benefit from £720 tax relief for each person.
- Use your annual ISA limit for 2015/16 which is £15,240 per person, and can be split however you choose between cash and permitted investments, such as stocks and shares. Also consider using the junior ISA limit for 2015/16 which is £4,080 for children under the age of 18.
- The new Help to Buy ISA has now been introduced which enables first time buyers to save up to £200 per month (plus an initial £1,000 on opening the account) which will be topped up by the Government by 25% (up to a maximum of £3,000 on £12,000 of savings). It can be put towards homes worth up to £450,000 in London and £250,000 in other areas of the UK.
- Consider other tax efficient investments that are subject to an annual maximum such as the Enterprise Investment Scheme, Seed Enterprise Investment Scheme, Social Investment Tax Relief and Venture Capital Trusts. These complex investments are potentially suitable for a sophisticated investor and bespoke advice should be taken.
- For companies with distributable reserves, consider the declaration of a dividend prior to 5 April 2016 before the new dividend rates outlined on page 6 come into effect.
- It is possible to elect to carry gift aid donations back to the previous tax year. This has the benefit of reducing the tax liability for the previous year and accelerating tax relief.
- If you are married, consider whether a jointly owned asset can be held more effectively for income tax purposes. Married couples are assumed to hold assets equally but this presumption can be overridden.
Capital Gains Tax ("CGT")
- The CGT annual exemption is £11,100 for 2015/16 – if you do not use the annual exemption, it cannot be carried forward and is lost. Consider realising capital gains so it is fully utilised.
- Gift assets to your spouse or civil partner at no gain/no loss so that they are able to dispose of the asset and utilise their CGT annual exemption of £11,100.
- "Bed and spouse" so that shares are disposed of by one spouse realising a capital gain (or loss). The shares can be repurchased by your spouse thus retaining the stock exposure without exiting the market and enabling cost of the shares to be uplifted.
- If you have assets that have fallen in value or have become worthless, you may be able to claim a capital loss and offset this against capital gains, saving tax up to 28%. Where the capital losses relate to shares in unquoted trading companies, it can be possible to offset the loss against income, providing tax relief of up to 45%.
- Where you expect to realise a significant capital gain, consider delaying the disposal until after 5 April 2016 – this will defer the date by which the tax is due by 12 months.
Inheritance Tax ("IHT")
- Each individual can make gifts of up to £3,000 in total each year without any IHT implications. If the £3,000 exemption was unused in the previous tax year, the exemption can be carried forward so the maximum available exemption can be up to £6,000.
- Other exemptions from IHT for gifts are available, such as the small gifts exemption allowing gifts of up to £250 to any number of people and gifts in consideration of marriage of up to £5,000 by a parent.
- A potentially valuable exemption from IHT is available for gifts out of surplus income that are both regular and do not affect your standard of living. Such gifts, if properly documented, are immediately outside the scope of IHT.
- If you are likely to be affected by the tapered annual allowance outlined on page 6, consider accelerating your future pension contributions and maximising what you can pay within the current higher allowance and before the new restrictions curtail your options. Likewise, if the lower lifetime allowance of £1m will affect you, consider a final contribution before 5 April 2016 and then register for IP16 and/or FP16.