With the tax year-end rapidly approaching, it is always worth considering whether there are steps that can be taken to minimise your tax liability for this and, potentially, future tax years. Below are a few common ways in which tax could be saved.
Utilising spousal rate bands and personal allowance
If you are paying tax at the higher or additional rates and your spouse is paying tax at the basic rate, it may be sensible to pass assets over to them to reduce the tax burden on you.
This could include shares, interest-producing bank balances, or the beneficial interest in rental profits.
Where a rental property has been purchased jointly, the default position is that profits are divisible on a 50:50 basis. However, it is possible to vary that interest through a Deed (or Declaration) of Trust, whereby you would effectively hold your 50% in trust for the beneficial interest of your spouse. All transfers of chargeable property between spouses are free of CGT. However, once the transfer has been effected, the spouse will have 100% of the equitable interest. Advice should also be taken on the implications of SDLT where mortgages are attached to property.
Advice should be taken before transferring any shares in regulated entities.
Charitable donations
If a donation is made to a charity registered for Gift Aid, your basic rate band is extended by the grossed-up amount of the gift. For example, if you contribute GBP1,000, your basic rate band is extended by GBP1,250, saving GBP250 in tax if you are a 40% taxpayer and GBP312.50 if you are an additional-rate taxpayer.
If your total 2022/23 income is between GBP100,000 and GBP125,140, this can save even more by avoiding clawback of some or all of your personal allowance depending on the amount donated. Earnings between GBP100,000 and GBP125,140 are taxed at an effective rate of 60% because of the personal allowance clawback.
It is also possible to contribute chargeable assets to charity (for example, shares). If you do this, your overall income is reduced by the value of the gift.
Do not overlook the fact that gifting cash or assets to charity can also reduce your estate for Inheritance Tax purposes.
If you do not donate to your chosen charity before 5 April 2023, you can include donations made between 6 April 2023 and the submission of your 2022/23 tax return within your self-assessment form and still claim the higher or additional tax relief for 2022/23.
A word of warning: if you donate to a charity registered for Gift Aid and do not pay any tax, HMRC may still expect you to include the donation amount on your tax return and pay the basic-rate tax, as HMRC will already have paid the charity the 20% associated with Gift Aid.
There is no relief for non-EU charities and, for charities situated in the EU, they must have registered in the UK.