At 14 January, there is barely three months left of the current fiscal year 2019/20. Now is therefore an important time to start considering the merits of Pre Year End Tax Planning.
As well as helping to manage your tax affairs and liabilities for this tax year, the planning can help to set you up efficiently for the new year, starting on 6 April.
Please browse our list of things to think about…………..
The following list of Pre Year End Planning thoughts focuses exclusively on individuals for whom the 5 April is the end of tax year date.
[For companies, their financial year end will be the key date, which might be any month end in the calendar of course. Tax Tuesday will handle pre year end ideas for companies in a separate blog-post, in due course.]
- Managing income bands and allowances
- Personal allowance (PA)
Make sure you utilise your £12,500 tax free PA for this year if you have scope to turn on an income tap and/or transfer income-yielding assets between spouses or other family members. After 5 April your PA for this year is lost forever.
- Basic rate band (BRB)
Consider taking steps to utilise your £37,500 BRB if, by omitting to do so, you might face higher rate tax charges in future on income which could come to you now. After 5 April your BRB for this year is lost forever.
- Dividend nil rate band (Divi NRB)
Make sure you utilise your £2,000 Divi NRB if you are able to turn on a dividend tap prior to 6 April. Again, by that date the allowance will be history if it is not used.
- £100,000 (and other high income thresholds)
If you are liable to exceed any of the higher rate thresholds, above which your exposure to Income Tax will be materially higher, then consider the merits and practicalities of deferring income or diverting to others (see 5. below) with lower rate capacities.
The £100,000 income threshold is a particularly important threshold because, above this level, the PA begins to be withdrawn. This means that the effective tax rate for income between £100,000 and £125,000, in 2019/20, is 1.5 times the nominal rate (eg where the nominal rate is 40% for the income in question, the effective tax cost becomes 60% if your income levels are not managed).
- Spouses and other family members
With all of the potential management of income bands (above in 1. to 4., and also below in 6. to 8.), do not forget that your scope for planning may be enhanced by the availability of other household members from whom, or to whom, income might be transferred. Subject to certain restrictions, pre year end planning needs to factor in all relevant individuals.
- Personal Savings Allowance (PSA)
If you are a basic rate taxpayer, try to maximise use of the £1,000 PSA (or £500 if you are a higher rate taxpayer).
- £5,000 savings income for non-taxpayers
If your other income (eg from work or pension) falls below the £12,500 PA, interest of up to £5,000 is free of Income Tax. This is in addition to the £1,000 PSA noted in 6. above. Taken together, this allowance, the PA and PSA might mean £18,500 of tax free income in 2019/20.
- Transfer of Marriage Allowance (MA)
If the higher earner of a married (or civil partnership) couple is a basic rate taxpayer, then up to 10% of the lower earner’s unutilised PA (ie a maximum of £1,250) can be transferred to the higher earner for their use.
- Pension contributions and Gift Aid
- Annual allowance (AA) and carry-forward relief (CFR)
Pension contributions can be very effective in managing your Income Tax liabilities through higher rate tax relief and other positive impacts upon income thresholds.
You should take advice on your capacity within the normal AA (and any CFR you might have, to contribute even more). Eligible payments made personally increase your BRB, push back your £100,000 threshold (see above) and even extend the threshold above which any Child Benefit you have received in the year is clawed back.
- Gift Aid
If you make donations to charity, these also serve to impact tax thresholds in a similar way to pension contributions per 1. and should be managed/timed for maximum effect, both for the benefit of the charities you support and for your own personal Income Tax exposures.
- Investments and deposits
- Individual Savings Account (ISA)
You have an ISA allowance of £20,000 in 2019/20, the future income on which is exempt from Income Tax. You might want to explore your scope to utilise your allowance before 6 April.
- Enterprise Investment Scheme (EIS) and Seed EIS (Seed)
Qualifying investments in EIS and/or Seed companies entitle the subscriber to credit 30% (EIS) or 50% (Seed) of their invested amount(s) against their total Income Tax liability for the year. These credits can therefore be powerful in providing significant discounts to the cost of the investments involved. There are potential further benefits involved so take advice if you are interested in these tax-advantaged investments.
- Venture Capital Trust (VCT)
Although structured in a different way and subject to different eligible maximums, investment in VCT companies also provides the subscriber with a 30% cost deduction against their total Income Tax bill for the year in which the VCT shares are subscribed.
CAPITAL GAINS TAX
- Bed and breakfasting
Where you have stocks and shares which might include some standing at potential gains and you have not otherwise utilised your £12,000 gain exemption (called the CGT annual exemption), consider “bed and breakfasting” near the year end, in order to turn that gain exemption into increased base cost in the shares you hold going forward.
By locking in the exemption, you will make sure that a future sale of the “bed and breakfasted” shares suffers a lower taxable gain and lower CGT than would otherwise be the case if you had omitted this manoeuvre.
- Crystallising losses
Where you have taxable gains, especially taxable gains on dwellings which suffer the highest rates of CGT, consider whether there might be merit in crystallising any potential losses on other assets by means of disposal(s) before 6 April.
By election, tax losses can accrue to assets which have become of “negligible value”, without the need for any actual disposals.
- Separation in the year
If you have separated from your spouse during 2019/20, any transfers of chargeable assets between you which take place prior to 6 April will preserve the nil gain/nil loss position available to married (or civil partnership) couples. After that date, however, transfers will be taxable (even if you are not yet actually divorced).
Accordingly, this is a good time to be working on possible settlement arrangements which might involve transfers of assets.
- Disposal of former main residence
If you are contemplating the sale of a house which was once your only or main residence for taxation purposes, please note that, while the last 18 months of ownership will be treated as exempt (in addition to your previous periods of usage as a main residence), this last 18 months exemption falls to become only a last 9 months exemption for disposals after 5 April.
Furthermore, if you have let the former residence since moving out, then, while your disposal in 2019/20 will benefit from an additional CGT relief known as “lettings relief”, this will be withdrawn for most disposals after 5 April.
Accordingly, where disposals of former main residences are pending, there might be significant merit in working hard to get those over the line in this tax year.
- Annual amount
You are entitled to gift £3,000 of capital each year without this transfer being subject to any form of Inheritance Tax, now or in future. Furthermore, if you did not use your £3,000 allowance in the previous year, you can transfer £6,000 now.
This allowance needs to be utilised prior to 6 April.
The above are the main headline pre year end planning manoeuvres which are likely to apply to the widest range of U.K. taxpayers. This list cannot replace the bespoke requirements of individuals with all their own particular circumstances but should, nevertheless point you in the right direction.
In practice, the planning involved will need to be advised upon and implemented by the relevant parties here at Harold Sharp, so if you would like to explore some or all of the above, please get in touch with your relationship principal or or send an email to Tax Partner, Chris Barrington.