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 2022/23 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 2023, you can include any donations made between 6 April 2023 and the submission of your 2022/23 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.