As the current tax year draws to a close on 5 April 2018, we would like to take the opportunity to summarise a few tax planning points that could be considered now.
We appreciate that not all of them may be relevant to you but if there is anything below you wish to discuss with us ahead of the end of the tax year –
Please do contact Jon Chambers (Tax Partner) on:
0207 306 9105 or firstname.lastname@example.org
The annual pension contribution allowance is currently £40,000. If you haven’t made the maximum contributions in 2017/18, acting now could reduce your income tax liability.
The annual allowance is reduced by £1 for every £2 over £150,000 of an individual’s taxable income, to a minimum allowance of £10,000. Unused annual allowances from the previous 3 tax years, i.e. 2014/15, 2015/16 and 2016/17 can be brought forward and used in 2017/18.
Capital Gains Tax (CGT) and annual exemption
If you have not yet utilised it, and it is possible to do so, you may wish to use your CGT annual exemption of £11,300. If you are married or in a civil partnership, making sure both partners’ exemptions have been used could entitle a couple to £22,600 of tax-free gains. If you have already realised gains in 2017/18 and hold assets which stand at a loss, it could be tax efficient to realise loss-making assets within the same tax year to mitigate your overall tax exposure. Alternatively, if you have already utilised your annual exemption, consider waiting until after the end of the tax year to make further disposals.
No income tax is payable on the first £5,000 of dividends received in a tax year. However, from 6 April 2018 the dividend tax free amount will reduce to £2,000 so if you are able to, consider taking advantage of the higher amount whilst you can.
The dividend allowance counts towards the basic or higher rate bands. Therefore depending on the level of your other taxable income, income tax on dividends in excess of £5,000 will be charged at 7.5%, 32.5% and 38.1%.
Tax on savings income
The first £1,000 of a basic rate taxpayer’s savings income is tax free. The savings allowance is £500 for higher rate (40%) taxpayers and no allowance is available for additional rate (45%) taxpayers. Banks no longer deduct 20% basic rate tax from interest.
Individual Savings Account (ISAs)
All income and gains from ISAs are tax free. In 2017/18 the maximum annual contribution (of either cash or shares or both) to an ISA is £20,000. Shares acquired under tax-advantaged SAYE option schemes or share incentive plans may be transferred into an ISA within the contribution limit.
No tax is payable on the first £7,500 of the income received from renting a room in your main residence, if rent-a-room relief has been claimed.
Tax efficient investment
The Enterprise Investment Scheme (EIS) provides up to 30% income tax relief on investments not exceeding £1,000,000. The Seed Enterprise Investment Scheme (SEIS) gives income tax relief of up to 50% on investments not exceeding £100,000. Both EIS and SEIS relief can be carried back to the preceding tax year, i.e. 2016/17. The investments are also CGT exempt on exit provided that certain conditions are met. In addition, it may be possible to defer a capital gain on any asset when an EIS / SEIS investment is made (again, conditions apply).
Venture Capital Trust (VCT) investments also provide income tax relief at 30% on investments not exceeding £200,000. In addition, dividends received in respect of the first £200,000 worth of VCT investments made in a tax year are tax free. As with the EIS and SEIS, provided certain conditions are met, a capital gain made on a disposal of VCT shares may be exempt from CGT.
Gifts to charity
Donations to charity under Gift Aid provide relief against the higher rates of income tax and are generally relieved in the tax year in which the donation is made. Tax relief is also available on gifts to charity of quoted shares or land and buildings.
Inheritance tax (IHT)
Individuals have an IHT annual exemption of £3,000 per tax year. Any unused annual allowance from one previous tax year, may be carried forward to the next tax year. It could therefore be possible to gift £6,000 in 2017/18 and save up to £2,400 in IHT. In addition, there are various other ways to reduce your estate for IHT purposes, such as making small gifts of £250 or less, gifts out of surplus income, etc.
Other outright gifts of any amount are exempt from IHT provided the donor survives the next seven years and the gift is to another person and for example not to a non-charitable trust.
The comments in this article are intended to summarise possible options and should not be construed as tax or investment advice. Please do not make any decisions in respect of the items above without obtaining specific advice from either myself or the tax manager responsible for your affairs.