Planning ahead and starting early can make a big difference to your overall tax liability and ensures you do not miss out on opportunities that could provide sizeable benefits.
Some tax issues to consider are:
Use your annual pension allowance
Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of the annual allowance, which is £40,000 for most people, or your net relevant earnings. It may also be possible to take advantage of your unused annual allowance from the three previous tax years.
This is a complex area as pensions are subject to a lifetime cap as well as potential restrictions for higher earners, so you should get specialist advice before making any contributions.
Transfer income-producing assets to your spouse or civil partner
Transferring assets such as property or quoted investments to a spouse or civil partner are accepted by HMRC provided there is an outright gift with no conditions attached to it.
Following the change in how dividends are taxed, it can be beneficial for both spouses to receive dividends so that they both utilise the available zero percent band. The current band of £5,000 drops to £2,000 from 6 April 2018 and, where this is going to lead to a tax liability, will the excess be income of the spouse subject to a lower rate of tax?
From April 2017 there has been a restriction in the amount of relief that can be claimed on interest charges by landlords who own residential property. The restriction is being phased in over four tax years and, by 2020/21, higher rate taxpayers will only be entitled to basic rate tax relief on their finance costs. Spouses/civil partners should review their ownership of residential rental properties.
As well as the potential income tax benefits, transferring assets between spouses/civil partners could reduce the high-income child benefit charge and also the potential loss of personal allowance. It is also important to consider Stamp Duty Land Tax (SDLT) implications where debt is involved.
Gift aid donations to charity also give tax relief at your highest marginal tax rate. Any donations made before 31 January of the following tax year, or the date of the submission of your tax return if earlier, can be carried back to the previous tax year. Cash donations made before both 31 January 2019 and the submission of your 2017/18 tax return can be included on your 2017/18 tax return.
Individuals can gift quoted shares or an interest in land to charity. This has the advantage of income tax relief being available on the market value of the asset as well as being exempt from capital gains tax.
This is the amount of income you can receive that you don’t have to pay tax on. In 2017/18 this is £11,500. The allowance is lost at a rate of £1 for every £2 of income where your adjusted net income is over £100,000 until the allowance is totally extinguished. This creates an effective income tax rate of 60% for income levels between £100,000 and £123,000.
Pension contributions and cash charitable donations can increase the amount of income that you can receive before you start to lose your personal allowance. In 2017/18, £1,150 of an individual’s personal allowance can be transferred to a spouse or civil partner, providing that neither the transferor nor recipient is liable to income tax above the basic rate band.
Married couples allowance is also available if one of the spouses was born before 6 April 1935 and could reduce your income tax bill by up to £844.50.
Gifts of £3,000 can be made annually with no impact on the nil rate band of £325,000 or inheritance tax charge. If you don’t reach the £3,000 limit in one tax year, the balance can be carried forward, but only for one tax year. There are also reliefs on gifts to any one person of up to £250 annually and gifts out of the transferor’s excess income, although, as ever, various conditions have to be met.
Capital Gains Tax
There is an annual exemption for CGT of £11,300 for 2017/18 for individuals. Spouses/civil partners could consider transferring assets to ensure that they both utilise their annual exemption and also any gains above this being taxed so as to make maximum use of any unused income tax basic rate band if one of them is a higher rate taxpayer.
Disposal of assets – timing
Consider timing carefully if you are disposing of assets. In some cases, it is better to sell assets before the end of the tax year (if you have a un-utilised annual exemption). In other cases, it might be better to delay a disposal so to take advantage of the following year’s annual exemption and/or defer the payment of any capital gains tax for another 12 months.
The 2017/18 overall limit for ISAs is £20,000. This can be invested in cash or stocks and shares. Any income or gains arising from the investments will be tax-free.
If you are aged between 18 and 40, consider opening a Lifetime ISA (LISA). An individual can contribute up to £4,000 per year while under 50 and receive an additional 25% Government bonus. This means for every £4 contributed, the Government will add a further £1, worth up to £1,000 a year. A LISA can also be used to help fund your first home.
LISA contributions count towards an individual’s annual ISA contribution limit but any bonus received does not.
EIS, SEIS, VCT and SITR investments
There are various tax advantages to be gained from making investments within the following categories: enterprise investment scheme (EIS), seed enterprise investment scheme (SEIS), venture capital trusts (VCT) and the social investment tax relief (SITR).
Given the nature of these investments and that they have very specific conditions which must be met, it is important to seek advice before committing your money.
If you have a tax query, why not contact the Tax Advice Line on 0844 892 2470 to discuss it. Our team of experts have a wealth of experience and can also provide a written consultancy service at £180 per hour plus VAT.