UK: Get Ready For The Tax Year-End

Last Updated: 24 February 2015
Article by Chris Springett

Tips for individuals on tax planning before the 6 April deadline

If you want to minimise your tax liabilities in the current tax year, here are some points worth considering before 6 April 2015.

Spouses with little or no taxable income

If you are married and one of you has an unused basic rate band or even personal allowance, it is worth considering whether income-producing assets can be transferred and subsequently owned legally by the other spouse. HMRC is relaxed about the transfer of certain assets to a spouse, such as property or quoted investments, providing they are genuinely given away, but it can be less relaxed when it comes to shares in private companies.

Taxable income between £100,000 and £120,000

If you have total taxable income between £100,000 and £120,000, an effective tax saving of 60% is available if your income is brought below £100,000, for example as a result of a gift aid payment or pension contribution.

CGT annual exemption and losses

You pay capital gains tax (CGT) on gains arising on the disposal of assets, such as shares or buy-to-let properties, charged at 28% (or 18% where there is an unused basic rate income tax band). If you are married, you and your spouse each have annual CGT allowances of £11,000 for 2014/15 but you need to 'use it or lose it'. If gains have accrued on family investments, it may be possible to use both exemptions by thinking ahead. At 28%, the annual exemption is worth over £3,000 (£6,000 for couples), so it is not to be sneezed at.

A simple way to use the exemptions is to sell successful investments to crystallise the gain and then repurchase the shares in an Individual Savings Account (ISA), so that future gains will accrue tax-free.

CGT entrepreneurs' relief

To qualify for entrepreneurs' relief on the disposal of shares in an unquoted company, you must be an officer or employee of the company for the 12 months prior to sale, and generally own at least 5% of the shares and voting rights for that time. This point can be easily overlooked and should be borne in mind if you're considering a sale.

Pension planning

The annual pension allowance is now £40,000. However, any unused allowance is carried forward for three years, which does allow for some catching up, particularly as you approach retirement.

The lifetime limit on the pension pot you can accrue without incurring the lifetime allowance charge fell from £1.5m to £1.25m on 6 April 2014. Anyone with accrued pension benefits over £1.25m at 6 April 2014 can elect to retain a higher amount and should seek advice.

If you have no earnings, it is still possible to contribute up to £3,600 gross (£2,880 net) per year to a stakeholder pension.

Private residence election

Once a dwelling is regarded as your only or main residence, the last 18 months of ownership (this was reduced from three years with effect from 6 April 2014, although special rules apply to those in nursing or care homes ) are exempt from tax. If you have two or more residences, it may be possible to nominate which one is treated as the main residence within two years of occupying the second residence. A new two-year time limit starts whenever there is a new residence in the mix. This is a complicated area so be sure to take advice, especially as the rules are due to be refined from April 2015.

Tax-efficient investments

There are a number of government-backed schemes that make investment highly tax efficient. The simplest is the ISA, but there are others, such as Venture Capital Trusts (VCT), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS), which give a variety of tax reliefs. These, however, should be considered as high-risk, long-term investments (i.e. five years or longer). Please remember that the value of investments can go down as well as up and investors may not get back the original amount invested. Appropriate advice should be taken prior to committing your funds.

Gifts to charity

If you have a favourite charity, couples should also ensure that the higher rate taxpayer makes the gift.

Gifting certain assets to charity, such as quoted shares, also provides income tax relief, while no CGT is payable on the disposal of the shares to the charity. Ideally these should be shares standing at a gain as any loss arising on such a gift would not be allowable.

Inheritance tax planning

Soaring house prices have pushed more and more people into the inheritance tax (IHT) trap, so it is not only the super-rich who are affected. Currently, IHT is charged at 40% on anything you leave over the nil-rate band threshold (currently £325,000) when you die. However, for married couples, any proportion of the nil-rate band left over on the first death can be added to the nil-rate band on the second death.

A special tax rate of 36% applies if you leave 10% of your net estate to charity. This may require some careful redrafting of your will, taking the opportunity to review the amount you leave and to whom.

The easiest way to reduce the impact of IHT is to make gifts to others while you're alive. You can give £3,000 a year to other individuals (such as your children) and if you have not already done so, you can use the previous year's as well as the current year's allowance. You can also make a one-off gift of £5,000 to your children and £2,500 to your grandchildren as wedding gifts. These gifts are completely free of inheritance tax.

Regular gifts made out of excess income are also exempt, for example, where a grandparent has an established pattern of giving cash birthday presents to grandchildren.

Most lifetime gifts are exempt provided you survive seven years from the date of the gift

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 2015. code: 15/088 exp:31/7/15

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