UK: Personal Tax And Trust Checklist 2014/15

Last Updated: 26 February 2015
Article by Smith & Williamson

There are opportunities for you to put your tax and financial affairs in order, some of which are outlined in this checklist. In all cases you should take specific advice before 5 April 2015 from your usual Smith & Williamson contact.

Current hot topics

Ahead of the General Election this year, Chancellor George Osborne announced a number of 'giveaways' in the Autumn Statement designed to get the Government's political bandwagon rolling. Our Autumn Statement 2014 commentary is available on our website: www.smith.williamson.co.uk/autumn-statement-2014 If you have any queries on the Autumn Statement contact your usual Smith & Williamson adviser.

45% tax and loss of personal allowance

The highest rate of tax remains at 45%, which applies to individuals with income over £150,000. Personal allowances are tapered for individuals with income between £100,000 and £120,000 (2014/15), and between £100,000 and £121,200 (2015/16), giving an effective tax rate in this band of 60%. The following checklist may assist in reducing your taxable income.

  • Consider making pension contributions or charitable gift aid payments.
  • 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, as returns are taxed at a maximum capital gains tax (CGT) rate of 28%.
  • Give consideration to the timing of income to maximise use of rate bands.

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) in the £50,000 to £60,000 band? (See section above).

Where it is not possible to reduce income to below £50,000 ,the recipient can elect not to receive CB. It is important still to make CB claims with the benefits office to obtain the linked National Insurance contribution credits.

A new childcare scheme will be introduced from autumn 2015.

  • Maximum support will be 20% of costs up to £10,000 per child, with children under 12 qualifying within the first year of operation.
  • All parents of the child must be working, with neither receiving an income over £150,000 per annum nor support through tax credits or universal credits.
  • Parents already in an employer-supported childcare scheme will have the option to remain in that scheme.

Tax-free/tax efficient investments

There are various tax-free and tax-efficient investments.

  • Consider making tax-free investments through ISAs, National Savings and so on.
  • Make use of the annual ISA subscription (2014/15 limit £15,000).
  • Consider funding a cash-only ISA (2014/15 limit £15,000) 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 2014/15 is £4,000, split as desired between a stocks and shares or cash-only ISA. Withdrawals are restricted until age 18.
  • Think about Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) investments, as they provide tax shelter/deferral incentives.

Independent, fee-based advice on the suitability of these investments for particular circumstances can be provided by our financial services team. Your tax adviser can put you in contact with the team.

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 (SEIS) applies to certain investment in small start-up companies. The maximum investment is £100,000, with income tax relief of up to 50%. Reinvestment relief is available to shelter 50% (from 2013/14 onwards) of gains realised on other assets where the disposal proceeds are reinvested in SEIS investments made before 5 April 2015.

Sole traders and partners

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

The VAT registration threshold is currently £81,000. Where turnover for the last 12 months (i.e. not on a tax year basis) 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 planning? This could include capital allowance claims – particularly those for short-life assets. The annual investment allowance gives a 100% deduction on qualifying expenditure. The current limit is £500,000 for qualifying expenditure in plant and machinery from 6 April 2014 (1 April 2014 for corporation tax purposes) to 31 December 2015. For accounting periods spanning these dates, the limits are pro-rated and calculations can be complex.

You can discuss the options for using any tax losses with your tax adviser.

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, whichever is greater). This cap only applies to reliefs otherwise unrestricted, such as trading losses and certain interest payments.

Capital gains tax

CGT is currently charged at either 18% or 28% for all gains above the annual exemption (currently £11,000 for individuals). Planning can ensure that taxable gains are reduced by making use of available exemptions and reliefs, as follows.

  • Consider selling assets standing at a gain to use your annual exemption each year.
  • Consider selling assets standing at a loss or 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.
  • If you have sold any properties, including what you consider to be your only or main residence, please inform your tax adviser. Usually, your main residence will be covered by principal private residence relief. However, where grounds are over half a hectare, this could be subject to CGT and will be required to be disclosed on your tax return. Your tax adviser will discuss what may or may not be charged to CGT, as each case will be dealt with on its own circumstances.
  • Review principal private residence relief notices to HMRC where you have more than one residence.
  • From 6 April 2015, there are new rules in respect of taxing residential property sold by non-UK residents and for the scope of private residence relief which will affect UK residents with overseas homes. Please see your tax adviser for more information or view our Autumn Statement commentary: https://www.smith.williamson.co.uk/autumn-statement-2014

Entrepreneurs' Relief

Is a business interest/asset/shareholding likely to be sold in the next 12-24 months? Where available, 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.

  • New rules from 3 December 2014 apply to remove a perceived tax incentive of incorporating involving Entrepreneurs' Relief and goodwill.
  • Entrepreneurs' Relief is now available for eligible gains deferred into investments which qualify for EIS or Social Investment Tax Relief (SITR).

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 £40,000 from 2014/15 (£50,000 in 2013/14). 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 2011/12 tax year therefore needs to be used by 5 April 2015.
  • The lifetime allowance (LTA) is £1.25m from April 2014 (previously £1.5m). It is possible to register for a protected lifetime allowance of up to £1.5m if the value of your pension savings exceeded £1.25m on 5 April 2014.
  • Consider whether a self-invested arrangement would give useful increased investment flexibility. 99 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.
  • From April 2015, there is the introduction of flexi-access drawdown. Please see your financial adviser for more information on this.

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

Independent, fee-based advice on pension contributions can be provided by our financial services team Your tax adviser can put you in contact with the team.

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 advise on this process.

  • Consider gifts to use the annual IHT exemption of £3,000, as well as any unused relief from 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 that 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 position and also gives you an overview of your assets – ask your contact for further information.

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 advise on this process.

  • Consider gifts to use the annual IHT exemption of £3,000, as well as any unused relief from 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 that 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 position and also gives you an overview of your assets – ask your contact for further information.

Review family Trusts

Changes in trust and tax law over the years mean your family trusts may no longer be fulfilling your family's needs effectively.

In the Autumn Statement it was announced that there will be new rules targeting perceived avoidance through the use of multiple trusts. However the draft legislation appears to provide for further multiple settlements to be established where different days are involved. Where property is added to multiple settlements on the same day, proposals are that all the same day settlements are taken into account when calculating IHT charges. The draft legislation is currently out for technical consultation.

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.

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