Tax Planning Suggestions before 5th April 2014
- During 2013/14 you can pay up to £50,000 gross into a pension plan (provided you have sufficient earnings). That limit reduces to £40,000 with effect from 6th April 2014. To the extent that you have not used up your £50,000 contribution limit in the three previous tax years, you may be able to increase the contributions in 2013/14 beyond £50,000 to a maximum of £200,000.
- Even if you have no earnings you may still contribute up to £3,600 gross into a pension plan either for yourself or for any of your children.
- With effect from 6th April 2014 the lifetime pension allowance reduces from £1.5million to £1.25million. If your pension fund is worth over £1.25 million you may wish to consider making an election to preserve the old limit (if no previous election has been made) or drawing pension benefits before 5th April 2014.
- ISAs allow modest amounts to be saved each year which grow tax free. The limits for 2013/14 are: cash £5,760 and stocks and shares £11,520. There are also Junior ISA’s available to certain minors. If you have not used up your allowance for 2013/14, you could make payments up to these limits, either side of 5th April.
- You can give away £3,000 each year completely exempt from Inheritance Tax with no requirement to survive 7 years. If you did not make a gift in2012/13, you can gift £6,000 in 2013/14.
- To the extent that your annual income after tax exceeds your annual expenditure, you can make regular gifts out income which should be exempt from Inheritance Tax provided they do not affect your standard of living. This can be a very efficient way of IHT planning in suitable cases.
- Straightforward gifts, with no strings attached and no reservation of benefit, are a simple and effective way of passing wealth on to another generation, provided the donor survives 7 years.
- Simply buying shares in an EIS company and holding them for two years is a way of reducing potential exposure to IHT as these assets would then not be subject to IHT because of Business Property Relief. This must however be balanced with the increased risk which is normally associated with EIS shares.
Capital Gains Tax
- Realising gains of up to the annual exemption (£10,900 for the tax year 20113/14) is simple and tax efficient. If you have already sold shares realising a gain in excess of the annual exemption, consider selling others standing at a loss to offset against the gains but do not buy the same shares back within 30 days. For married couples the 30 day anti-avoidance rule which matches the new purchase with the sale, does not apply to a new purchase by your spouse; so this offers an opportunity to a couple who want to realise a loss but retain the shares between them.
- Gains made on a sale of your main residence are generally totally exempt from capital gains tax unless there is a period when you were living elsewhere. Even if you lived elsewhere during the last three years of your ownership, that period will at the moment, also be an exempt period. For disposals after 5th April 2014 that exempt period reduces to 18 months so if you are close to exchange and these conditions apply, it might be better to exchange by 5th April 2014 rather than after that date.
- If you have realised capital gains in year 1 but capital losses in year 2, you might consider temporarily investing in an AIM company, deferring the gain and then selling soon afterwards to allow the loss to be set against the crystallised gain.
- Subscribing for Seed EIS shares in 2012/13 offered an opportunity for individuals to exempt gains realised on other assets as well as to obtain income tax relief at 50% of the cost of the shares. Income tax relief is still available at up to 50% of the cost of investments in Seed EIS shares made in 2013/14 and 2014/15 but the capital gains tax exemption is limited to a half. Nevertheless this offers the potential to save tax at up to 64% on an investment of up to £100,000.
- Where income levels are close to thresholds at which either the personal allowance may be lost, or your income may become charged at a higher tax rate band, consider:
- making a pension contribution or giftaid payment
- transferring income producing assets to your spouse
- moving to assets which are designed to produce capital gains rather than income.
- Subscribing for shares in an EIS company attracts income tax relief at 30%. This applies to shares costing up to £1,000,000 each year. The corresponding limit for Seed EIS shares is £100,000 but the income tax relief is up to 50%.
- Individuals who are partners in a partnership which has as one of its partners a company, may find that from 6th April 2014 some of the profits which would otherwise have been allocated to the company, will now be allocated to the individuals for tax purposes.
- For members of LLPs proposed new rules are intended to apply from 6th April 2014. Where a member meets all of the following three conditions, he will be treated as an employee and there will be an obligation to deduct PAYE and National Insurance contributions under RTI:
- At least 80% of the amount paid to the member in a year is “disguised salary”. Disguised salary for this purpose is either:
- variable but without reference to profits/losses or
- not in practice affected by overall profits or losses of the LLP.
- The member does not have significant influence over the LLP’s affairs.
- The member has contributed as capital to the LLP less than 25% of his disguised salary. The rules give 3 months from 6 April 2014 in which to make a firm commitment to make a 25% contribution by 5 July 2014.
HMRC are likely to apply penalties if a member who meets all three conditions, continues to be paid gross after 5th April 2014. In appropriate cases it may be worth considering altering the member’s arrangements with the LLP.
- Individuals wishing to become not resident in the UK should consider leaving before 5th April.
- A loan from your employer is exempt from the beneficial loan charge provided it does not exceed £5,000. That limit rises to £10,000 with effect from 6th April 2014.
- For those who are charitably minded, a gift of quoted shares standing at a gain can be particularly tax efficient with: a gross deduction against income for the value of the shares, exemption from CGT and removal of value from estate for IHT purposes. Quoted shares worth £10,000 given by a 45% taxpayer may reduce his income tax liability by £4,500.
- Gift Aid is also attractive to a higher rate taxpayer. A net cash gift of £8,000 will be worth £10,000 to the charity (as it claims a tax refund of £2,000 from HMRC) and a 45% taxpayer will be able to reduce his tax liability by £2,500, so that the net cost to him is only £5,500. It may be possible, with careful timing, to elect to treat a giftaid payment as if it had been made in the previous year.
- Single premium life assurance policies. An individual who is seeking to increase his income may increase withdrawals above 5% without incurring an income tax charge to the extent that the chargeable event gain does not take his taxable income beyond the basic rate band. Also if likely to become a higher rate taxpayer after 5th April 2014, consider drawing in excess of 5% now.
- HM Revenue and Customs no longer send us copies of PAYE coding notices. Those we do receive often contain significant errors in the codes which, unless corrected, can result in some clients having unexpected underpayments after the end of the year. In order that we may check that the correct amount of PAYE is being deducted, could you please forward to us coding notices as soon as possible.
- Sole traders might consider inviting their spouses to become partners or employees of the business especially where the spouse is a basic rate taxpayer and can do some work for the business.
- Where shares in an unquoted trading company have been subscribed for and have been sold at a loss, a claim may be made to set the loss against income. If the shares remain unsold but now have little value a similar result may be achieved by also making a negligible value claim.
We recommend that clients should obtain specific advice before taking any action in respect of the above planning points.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.