Dani Glover, head of financial services for London, and Tina Riches, national tax partner at Smith & Williamson, the accountancy, investment management and tax group, highlight some year-end planning issues to consider.
With the current tax year ending on 5 April 2017, it’s time to get your tax affairs in order. There may be planning opportunities that can give you sizeable benefits. To help you get organised, here are some of the most important planning points to consider:
Income tax
There are legitimate ways to mitigate the amount of income tax you pay.
Personal allowance
This is the amount of income you can receive that you don’t have to pay tax on. In 2016/17 this is £11,000. Unused personal allowances cannot be carried forward and are only part transferable in limited circumstances — so this is a case of ‘use it or lose it’.
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 £122,000.
In 2016/17 £1,100 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.
Transfer income-producing assets to your spouse
Transferring assets such as property or quoted investments to a spouse is accepted by HMRC provided there is a genuine gift of economic benefit from the property.
It’s not always necessary to give away total control; for example, some property can be owned in the proportion 99:1 and the income shared 50:50.
It’s worth noting that in the case of private company shares it’s the entire economic value of the share that must pass, and not simply the right to a dividend, to ensure it’s taxed on the other spouse.
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, so you should get specialist advice before making any contributions.
Charitable donations
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. So donations made before both 31 January 2018 and the submission of your 2016/17 tax return can be brought on to your 2016/17 tax return.
Any donations made after the date you submit your tax return cannot be carried back. For example, if the tax return for 2016/17 was submitted on
1 November 2017, donations on 25 November 2017 will be eligible for relief in 2017/18 but not 2016/17. If the return was not submitted until 1 December 2017, the benefit of the donation can be carried back to 2016/17 for tax purposes. Couples may wish to ensure that the individual with the higher marginal tax rate makes the gift.
It’s possible to gift quoted shares or an interest in land to charity. This has the advantage of income tax relief on the market value of the shares or land, while at the same time being exempt from CGT.
Changes to the taxation of dividends
From 6 April 2016, the way in which dividends are taxed changed. Rather than receiving a 10% tax credit on all dividends, from 6 April 2016 you will pay no tax on dividends of up to £5,000 each year. This zero percent band is in addition to the personal allowance, although dividends in the £5,000 band count towards total income, such as for the purpose of restricting the personal allowance or the high income child benefit charge.
The new dividend tax rates are as follows:
| Basic rate taxpayer | 7.5% |
| Higher rate taxpayer | 32.5% |
| Additional rate taxpayer | 38.1% |
For 2016/17, you will pay more tax on dividends than in previous years if you receive dividends of more than:
| Basic rate taxpayer | £5,000 |
| Higher rate taxpayer | £21,666 |
| Additional rate taxpayer | £25,250 |
Capital Gains Tax
There is an annual exemption for CGT of £11,100 for 2016/17. Like the personal allowance for income tax, this CGT annual exemption cannot be carried forward to a future year if unused. If you’re married, both you and your spouse each have an annual exemption so you may want to consider transferring assets to ensure it is not lost.
Tax-efficient investments
ISAs
The 2016/17 overall limit for ISAs is £15,240. This can be invested in cash or stocks and shares. Any income or gains arising on the investments will be tax free.
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.
Inheritance tax
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, it can only be carried forward for one year. There are also reliefs on gifts to any one person of up to £250 annually and gifts out of the transferor’s income, although, as ever, various conditions have to be met.
Start planning now
Small changes can make a big difference to your overall tax liability, so make sure you start tax planning early so you don’t miss out on opportunities that could provide sizeable benefits.
Authors
Tina Riches, Partner
Areas of expertise
Responsibility for tax risk and quality control; development of tax processes, disseminating tax information across the Smith & Williamson group; tax media work.
Daniela Glover, Head of Financial Services
Areas of expertise
Holistic financial planning; retirement planning; financial planning in relation to divorce; pension sharing reports.
Risk warning:
VCTs and EISs are highly illiquid investments, with investors potentially having difficulty in realising their investment at a given time. They should therefore only be considered as a long-term investment, i.e. over five years. They also carry the risk of potentially losing all or part of your capital investment and therefore the return of your capital is not guaranteed.
If you’d like to start a conversation with Smith & Williamson please contact the Find a Wealth Manager team HERE. They will ensure you get direct access to the investment professional who matches your profile.
Disclaimer:
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
The tax treatment depends on the individual circumstances of each client and may be subject to change in future.
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