UK: Private Client And Trust Tax Checklist 2013/14

Last Updated: 28 January 2014
Article by Smith & Williamson

There are opportunities for action before 5 April 2014 to put your tax and financial affairs in order. Some of these opportunities are outlined in this checklist. In all cases you should take specific advice from your usual Smith & Williamson adviser.

Current hot topics

Much has been made in the media about what is generally acceptable in tax planning. If you have any concerns on this or any other issue, then contact your usual Smith & Williamson adviser.

45% tax and loss of personal allowance

The highest rate of tax is now 45% which applies to individuals with income over £150,000. Personal allowances are tapered for individuals with income between £100,000 and £118,880 giving an effective tax rate in this band of 60%. The following may assist in reducing your taxable income.

  • Consider making pension contributions or charitable gift aid payments (see below).
  • Transfer income-generating assets between spouses/civil partners if possible.
  • Use tax-free investments and/or tax efficient investments.
  • Invest in assets which generate capital growth rather than income so returns are taxed at a maximum CGT rate of 28%.
  • Consider timing of income to smooth out fluctuations if near the limits.

Children and Grandchildren

An income tax liability arises in respect of child benefit (CB) if the recipient, or their partner, has an annual income exceeding £50,000. The tax charge applies to the partner with the higher income and is on a sliding scale such that where income is £60,000 or more the tax charge equals the amount of CB. Can anything be done to reduce taxable income(s) to below £50,000? (see above).

Where it is not possible to reduce income, the recipient can elect not to receive CB. It is important to still make CB claims with the Benefits Office to obtain the linked national insurance contribution credits.

A consultation has commenced on a proposed new childcare scheme to be introduced from August 2015.

  • Payments into the scheme will be matched by 20% contributions from Government subject to a maximum of £1,200 per child per year.
  • Current proposals are only for children under 5, but with the age limit increasing annually by year until they reach 12.
  • Not available where a parent earns over £150,000 or where both parents do not work.

Depending on your circumstances it may be better to join an old style scheme prior to these changes coming into effect.

  • Opt to continue with current scheme if beneficial.

Tax free/ tax efficient investments

There are various tax-free and tax efficient investments.

  • Consider making tax-free investments through ISAs, National Savings, etc.
  • Use the annual ISA subscription (currently £11,520).
  • Consider funding a cash-only ISA (2013/14 limit £5,760) for children/ grandchildren aged 16-18.
  • Consider Junior ISAs for children under 18 who do not have a child trust fund. The annual subscription limit for 2013/14 is £3,720, split as desired between a stocks and shares or cash-only ISA. Withdrawals are restricted until age 18.
  • Think about enterprise investment scheme (EIS) and venture capital trust (VCT) investments as they provide tax shelter/deferral incentives.

Advice on the suitability of these investments for particular circumstance can be provided by our Financial Services team. The advice is independent and fee based. Your tax adviser can put you in contact with an adviser.

Enterprise investment scheme

EIS applies to investments in qualifying unquoted companies with a permanent UK establishment. Income tax relief of up to 30% is available on up to £1m of personal investment(s) in the current tax year. Gains on the sale of EIS shares can be exempt from CGT and the investment can be used to defer gains on other assets.

Seed EIS applies to certain investment into small start-up companies. The maximum investment is £100,000 with income tax relief of up to 50%. Reinvestment relief is available to shelter gains realised on other assets in 2012/13 (100%) or 2013/14 (50%) where the disposal proceeds are reinvested in Seed EIS investments made before 5 April 2014.

Sole traders and partners

Businesses are required to keep adequate business records so that they meet their legal obligations. If you would like a review of your records to ensure they are adequate please speak to your usual contact at Smith & Williamson.

The VAT registration threshold is currently £79,000. Where turnover is reaching this level you should seek advice to ensure that you comply with your obligations.

Have you discussed your accounts and computations with your adviser to identify areas for tax saving or forward planning? This would include capital allowance claims - particularly those for short life assets. The annual investment allowance gives a 100% deduction on qualifying expenditure. The annual limit is £250,000 for qualifying expenditure in plant and machinery from 1 January 2013 to 31 December 2014.

Discuss with your tax adviser the options for using any tax losses.

Losses and tax deductions

There is a cap on income tax reliefs to prevent individuals from claiming reliefs in excess of £50,000 (or 25% of their income if greater). This cap only applies to reliefs otherwise unrestricted such as trading losses and certain interest payments.

Capital gains tax

Capital gains tax (CGT) is currently charged at either 18% or 28% for all gains above the annual exemption (currently £10,900). Planning can ensure that taxable gains are reduced by making use of available exemptions and reliefs.

  • Consider selling assets standing at a gain to use your annual exemption each year.
  • Consider selling assets standing at a loss and make a 'negligible value' claim on assets which currently have no value to reduce current year gains.
  • Transfer assets between spouses where appropriate to maximise reliefs available.
  • Review principal private residence relief elections where you have more than one residence.
  • Consider whether entrepreneurs' relief is available if selling business assets.

Entrepreneurs' Relief

Is a business interest/asset/shareholding likely to be sold in the next 12-24 months? Entrepreneurs' relief reduces the rate of CGT from 28% to 10% for gains up to £10m (the lifetime limit). The rules are tightly drawn and require detailed consideration. They should be discussed with your tax adviser to establish the possibility of a claim and to identify any steps needed.

Retirement

Have you reviewed your pension arrangements recently to ensure they meet your retirement objectives?

  • The qualifying age for the state pension has changed. This may mean you need to increase your pension contributions.
  • There is an annual contribution allowance of £50,000 (reducing to £40,000 in 2014/15). Where the allowance is not used for one year it can be carried forward for up to three years. Any unused annual allowance for the 2010/11 tax year therefore needs to be used by 5 April 2014.
  • The lifetime allowance (LTA) of £1.5m is being reduced to £1.25m from April 2014. It is possible to register for a protected lifetime allowance of up to £1.5m. If the value of your pension provision may reach these levels you should review whether a form of protection is appropriate prior to this date.
  • Consider whether a self-invested arrangement would give useful increased investment flexibility.
  • Consider setting up a stakeholder pension scheme for non-earning spouses and children. The maximum net payment is £2,880 which will be grossed up to £3,600 by HMRC.

Your financial provision for retirement can also be met through alternative investments such as ISAs.

Charitable giving

Using gift aid can reduce your income tax liability and also allows the charity to receive extra funding.

  • Complete gift aid declarations to ensure that ad hoc gifts receive tax relief, as long as you pay sufficient tax to cover the tax reclaimed by the charity.
  • Ensure that any charitable donations are made by the spouse with the highest income to benefit from higher rate tax relief under the gift aid scheme.

Bear in mind that gifts of land, buildings and quoted shares to charity can attract income tax and CGT reliefs.

Planning for the future

Are you aware of the extent of your inheritance tax (IHT) exposure or would you like to make provision for the next generation? We can assist in this process.

  • Consider gifts to use the annual IHT exemption of £3,000 as well as any unused relief of the previous tax year.
  • Separate gifts of up to £250 can be made to any number of individuals in a tax year (more if made in consideration of marriage/ civil partnership).
  • Ensure that business assets are structured correctly so agricultural property relief and/or business property reliefs are maximised.
  • Consider lifetime gifts to start the seven-year clock running and mitigate IHT on death. Advice on the CGT and IHT implications is essential.
  • Take advantage of the relief for regular gifts made out of income which are free of IHT even if death occurs within seven years. This requires a regular pattern of gifts that leaves the donor with sufficient income to maintain their usual standard of living. These ought to be properly structured and recorded.
  • Consider taking out life assurance policies to fund any exposure to IHT. Ensure that the policies are written in trust to mitigate IHT.
  • Review wills and estate planning arrangements.
  • If you leave 10% of your net estate to charity the IHT rate on death could reduce from 40% to 36%.

We have developed a straightforward report which estimates your potential IHT and also gives you an overview of your assets – ask your Smith & Williamson contact for further information.

Review family trusts

There have been changes in trust and tax law over the years and your family trusts may no longer be fulfilling your family's needs effectively.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2013. code: NTD162 expiry date: 05/04/2014

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