With the tax year end rapidly approaching, it is always an idea to consider whether there are any steps that can be taken to minimise your tax liability for this and possibly, future tax years. Below are a few of the common ways in which tax could, potentially, 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 so as to reduce the tax burden on you.
This could be 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 the 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, you should be aware that 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.
If a donation is made to a charity registered for the gift aid scheme, your basic rate is extended by the ‘grossed up’ amount of the gift. For example, if you contributed £1,000, your basic rate band is extended by £1,250, saving you £250 in tax if you are a 40% taxpayer and £312.50 if you are an additional rate taxpayer. Should your total 2021/22 income be between £100,000 and £125,140, it will save you even more, as it will avoid clawback of some or all of your personal allowance depending on the amount you donate. Earnings between £100,000 and £125,140 are taxed at an effective rate of 60% because of the personal allowance clawback.
It is also possible to contribute chargeable assets to charity (e.g. shares). If you choose to do this, your overall income is reduced by the value of the gift.
Do not overlook the fact that by gifting cash or assets to charity, you are reducing your estate for Inheritance Tax purposes.
One other point on charitable donations- if you do not manage to donate to your favourite charity before 5 April 2022, you can include any donations made between 6 April 2022 and the submission of your 2021/22 Tax Return within your Self-Assessment form and take advantage of the higher or additional tax relief.
A word of warning- if you donate to a charity registered for gift aid and do not pay any tax, HMRC will expect you to still include the amount of the donation on your Tax Return and pay the basic rate tax to them, as they will already have paid the charity the 20% you guaranteed to fund through tax paid when the donation was made.
There is no relief for non-EU charities and with those situated in the EU, they must have registered in the UK.
Tax Efficient Investments
It is sometimes worthwhile looking at investments in start-up businesses that have approval for EIS, SEIS or VCT relief.
EIS– up to £1,000,000 may be invested in qualifying companies. The resulting 30% tax credit may be offset against your tax liability for the year in which the investment is made or related back to the prior year. All or part of the relief can be related back.
Often overlooked in relation to EIS investments are a number of other advantages:-
- After the minimum holding period (three years), the shares may be sold at a gain and no tax is chargeable.
- If you sold a chargeable asset and invested in EIS qualifying shares one year before or three years after the disposal of that asset, the capital gain can be deferred. The deferral is £1 of gain for £1 of investment. When the shares are eventually sold, the gain comes back into charge.
- Loss relief is available where shares are disposed of at a loss at any time (this could also be by way of a negligible value claim). This may be taken against your income and is restricted by the amount of income tax relief given and not clawed back.
- The value of the shares will be covered by Business Property Relief for IHT purposes so if they are held for two years or more, their value on death will be outside your estate.
SEIS– up to £100,000 may be invested in qualifying companies. The resulting 50% tax credit may be offset against your tax liability for the year in which the investment is made or related back to the prior year. All or part of the relief can be related back.
Furthermore, you can exempt 50% of any chargeable gain made where you invest all or part of that gain in qualifying SEIS shares. For example, if you invested £75,000 in 2021/22 and in the same year you had a gain of £100,000, a total of £37,500 of that gain is exempt from tax.
As with EIS, if the shares are held for 3 years or more and relief was claimed on the initial investment, any gains will be exempt. Also, if shares are sold at a loss, it is possible to claim that loss against your income for the year in which the loss arose. If the election for income tax loss relief is not made, the default position is that the loss will be banked as a capital loss and is available to carry forward and be used against future capital gains.
VCT– an investment into a Venture Capital Trust may also be made. This can provide you with a 30% tax reduction on the amount invested up to a maximum £200,000 investment.
Dividends paid by VCTs are exempt (unlike EIS and SEIS) from tax and capital gains on the disposal of VCT investments will also be exempt.
ISAs- Every UK resident individual over the age of 18 can invest up to £20,000 in a new ISA in 2021-22. Investments can be in a cash ISA and/or a stocks and shares ISA in any combination of amounts, provided that the overall annual limit is not exceeded. Any part of the annual investment limit unused during the tax year is lost.
Income and gains arising within an ISA are free of income tax and CGT.
When an individual dies, their surviving spouse or civil partner benefits from an allowance up to the value of the deceased’s ISA savings at the date of their death. This is in addition to the surviving partner’s own normal annual subscription limit. In addition, ISAs keep their tax advantaged status during the estate administration period, meaning that personal representatives and beneficiaries do not face a tax charge on income and gains arising during this period.
Junior ISAs are available for all UK resident children under 18 years of age who do not already have a Child Trust Fund. Up to £9,000 can be invested in 2021-22 on behalf of a child (by parents, grandparents or other relatives or friends) in cash, stocks or shares. No withdrawals are permitted until the child reaches 18, when they can roll the Junior ISA into an adult ISA or take the cash.
In addition to any existing Junior ISA they may already have, 16 and 17-year-olds can open a cash ISA and invest up to £20,000 in it for 2021-22. A Lifetime ISA is available to those aged between 18 and 40. Individuals can save up to £4,000 a year, and will receive a government bonus of 25%. Restrictions apply: contributions can only be made until the individual is 50, and withdrawals before the individual turns 60 are subject to a 25% charge unless they are made to fund the purchase of a first home.
Generally, if you give money to your own children, the interest earned on the funds must not exceed £100 per tax year, otherwise you will pay tax on it. A key advantage of Junior ISAs is that they are excluded from this rule – so consider contributing to a Junior ISA for your children before the end of the tax year.
With pension relief and allowances constantly being changed by the government, it would be sensible to review whether you are able to make a contribution before the year end to use up your 2021/22 allowance and any allowance brought forward from the preceding 3 tax years.
If your income exceeds £240,000, your annual allowance is reduced by £1 for every £2 of income up to £312,000 (i.e. from £40,000 to £4,000). Consequently, if your income exceeds £312,000 each year, you only have £4,000 (£3,200 net) tax relievable pension contributions available to you.
You should note that both employer and employee contributions count towards your annual allowance. If the annual allowance for 2021/22 (including any brought forward) is exceeded, there will be clawback of all relief through Self-Assessment, including the 20% given by the government at source.
If your earnings are not too far over the £100,000 mark, it is prudent to consider a pension contribution in order to extend the basic rate band by the amount exceeding £100,000 because the effective rate between £100,000 and £125,140 is 60%. If your earnings are £125,140 and you make a £20,000 (net) contribution (assuming sufficient annual allowance), £25,000 will go into your pension pot and grow tax free whereas if you took the salary, you would receive £9,500 in your pocket after tax and NI.
You may also wish to consider making contributions of up to £3,600 to a pension scheme for a spouse, civil partner or child if they have no earnings of their own, to obtain basic rate tax relief on the contributions. For example, if you contribute £2,880, HMRC will pay in £720, giving a gross contribution of £3,600.
CGT Annual Exempt Amount
If you own shares or other chargeable assets, it is worth considering realising gains in order to utilise your annual exempt amount of £12,300 before the year end.
Where you are looking to sell assets, you could try and split the disposal between the 2021/22 and 2022/23 tax years so that you can use two annual exempt amounts.
Capital Losses & Overpayment Relief
Most time limits for making claims are now four years from the end of the tax year in which the transaction took place. For example, capital losses that arose in 2017/18 must be claimed by 5 April 2022 (i.e. four years from 5 April 2018).
If any errors were made in your 2017/18 Return resulting in an overpayment of tax, there is no possibility of going back, amending that year’s Return and claiming a refund after 5 April 2022.
If you are a shareholder in a corporate vehicle and there are distributable profits available, you should always take advantage of voting a tax free dividend of up to £2,000 per annum.
Furthermore, if your income has dropped within the basic rate band for 2021/22, any dividends paid in excess of £2,000 and not covered by the personal allowance, will only be taxable at a 7.5% rate where overall income does not exceed £50,000 for the year.
Whilst Trusts are not for everyone, there are still a number of advantages to be gained by investing in Discretionary Trusts.
For example, if you have children over the age of 18 in full time education, income producing assets can be placed in Trust (below a value of £325,000 in order to avoid triggering lifetime Inheritance Tax) and the income generated within the trust structure used to provide the children with an income stream throughout their stay at university. If the children are not working, any tax paid by the Trustees will be repayable to them in full (if within the personal allowance) or in part (if the income falls to be taxed in the basic or higher rate bands). At a point in the future, those assets (for example residential property) can be passed out to them once they are of an age to deal with the property sensibly.
It is also possible for a spouse to create a separate trust in order to utilise her Nil Rate Band of £325,000.
No capital gains are chargeable on passing chargeable property into Trust because of the availability of deferral relief under S260 TCGA 1992. The Trustees take possession of the property at its original cost, rather than market value. Any gain on ultimately passing the property out to the children can also be deferred so this is a useful way to pass assets to the next generation without incurring any liabilities.
There is also the added advantage of dispositions to Trusts reducing your overall estate for Inheritance Tax purposes. Whilst many clients are put off by a fear of complexity, Trusts are nowhere near as complicated as they may first appear.
Inheritance Tax Planning
IHT is payable at 40% of a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB). The NRB is £325,000 for 2021-22.
Consider gifting assets during your lifetime to minimise the IHT payable on your death. Such gifts will fall outside the IHT net after seven years, provided you do not reserve a benefit in the asset transferred. By making a gift now, you can start the seven year IHT ‘clock’, and after three years the amount of IHT potentially payable on the gift is tapered. The gifting of assets can give rise to CGT and may impact upon your lifestyle, so professional advice should always be obtained.
If you have income surplus to your normal living expenses, consider making use of the IHT exemption for gifts out of income. Such gifts are tax-free, even where death occurs within seven years. Appropriate documentation should be retained to show that the gift is regular, and made from income not required by the donor to cover his or her own living expenses.
Make use of other IHT reliefs and exemptions, such as the annual gifts exemption of £3,000 (£6,000 if no gifts were made during 2019-20), the small gifts allowance of £250 per donee, and gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else).
For detailed IHT planning advice regarding the possibility of reducing your potential IHT exposure please contact us.