Year End Tax Planning
Posted on 21st March 2021 at 19:45
The end of the tax year, 5 April 2021, is fast approaching. We are summarising below main tax planning points:
Capital Gains Tax
The annual allowance for 2020/21 is £12,300 and it cannot be carried forward. This can be used to crystallise gains on assets such as shares. An idea could be that shares are sold and reacquired in an individual savings account (ISA) or by a spouse, civil partner or anyone else.
As transfers between a husband and wife or civil partners can be made at no gain/no loss, if one party is thinking of selling an asset held in their own name, a transfer before the sale or disposal can mean that both annual allowances can be used. However, this transfer should be before any contractual commitment is made to the eventual sale and the sale proceeds should be paid in the appropriate shares and not all into the account of the original owner.
Main residence relief
From 6 April 2020, exemption for the final period of ownership of a property that has qualified at some point for only or main residence relief reduced from 18 to 9 months.
The personal allowance (£12,500 for 2020/21) cannot be carried forward, we recommend that it is used if possible. For clients operating through a limited company, this will be partially or fully utilised by a salary, and any remaining allowance can be utilised by paying a dividend.
There is a benefit in ensuring that a salary of at least the Class 1 National Insurance lower earnings limit of £6,240 is drawn so that credit is obtained for another year’s contributions towards the state retirement pension and perhaps other benefits. Drawing a salary of up to £9,500 can maximise use of personal allowances and gain that year’s National Insurance credit without payment of Class 1 National Insurance Contributions.
At the other end of the scale, the personal allowance is reduced by £1 for every £2 of income over £100,000. For 2020/21, the allowance is reduced to nil when income exceeds £125,000.
Tax Reliefs can be obtained via charitable gifts which can result in higher tax saving.
Monetary gifts to charities registered in the UK are eligible to tax relief under the gift aid scheme. The gift is treated as made net of basic rate tax, which can be reclaimed by the charity. The donor can then claim relief at their highest marginal rate by extending the basic rate band.
It needs to be noted that the donor must have paid tax during the tax year at least equivalent to that of the deemed tax reclaimed by the charity. If it has not, it will have to be paid to HMRC under Self Assessment.
Tax relief for pension premiums continues to be tax efficient. Gross pension contributions of up to £40,000 can be paid each tax year and unlike many allowances unused amounts can be carried forward.
Accurate and timely record-keeping is important for those wishing to maximise relief. The following points may be relevant.
• Relief during the year will be limited to the lower of qualifying earnings or £40,000.
• If you are a director of a limited company, your director’ salary might be your only source of income qualifying as Relevant UK earnings for personal pension contributions.
• Therefore, employer’s contributions can be made from the company to the director’s pension scheme as an alternative to the personal pension contributions, so tax relief will be claimed from a reduction in the corporation tax rather than through income tax.
Since 6 April 2016, individuals with a high income have had a tapered annual allowance, where for every £2 of adjusted income over a threshold, an individual’s annual allowance is reduced by £1.
From 6 April 2020, the adjusted income, which is broadly net income plus pension accrual, is increased from £150,000 to £240,000.
The Tapered Annual Allowance applies for individuals with 'threshold income' of over £200,000, and 'adjusted income' of over £240,000. The annual allowance will be £4,000 for individuals with total adjusted income (including pension accrual) over £312,000.
From April 2021, the annual allowance for individuals with total income (including pension accrual) of over £312,000 will be £4,000.
The lifetime allowance will remain same at the current level of £1,073,100 until April 2026.
The annual allowance is currently capped at £40,000, although a lower limit of £4,000 may apply if you have already started drawing a pension.
High income child benefit charge
An income tax charge is imposed on an individual whose adjusted net income exceeds £50,000 in a tax year and who is, or whose partner is, in receipt of child benefit. If both partners have an adjusted net income exceeding £50,000, the charge applies only to the partner with the highest income. The amount of the charge is 1% of the amount of the child benefit for every £100 of income above £50,000. If the individual’s adjusted net income exceeds £60,000, the charge is on the full amount of the child benefit. Child benefit itself remains non-taxable but the high income child benefit charge effectively claws back the benefit from high income taxpayers.
For clients with incomes above £50,000:
• a personal pension contribution would be beneficial. Reducing the benefit clawback will be an extra benefit over and above the normal rate of tax relief.
• a gift aid donation could have the same effect.
• The enterprise investment scheme (EIS) provides a tax reduction at the EIS rates (currently 30%) if, subject to conditions being met, an individual invests in newly-issued shares in an unquoted company. There is also a capital gains tax deferral relief and exemption if the shares are held for a qualifying period.
• The seed enterprise investment scheme (SEIS) is similar to the EIS but is aimed at investments in smaller, early stage companies. The relief is available on share subscriptions of up to £100,000 and relief can be carried back to the preceding year. The maximum income tax relief is 50% of the amount subscribed and there is a capital gains tax exemptions if the shares are held for three years and a partial exemption applies to chargeable gains on disposals of assets if the proceeds are invested through the SEIS in the same tax year.
• An investment of up to £200,000 for eligible shares in a venture capital trust VCT to raise will attract a tax reduction at 30% of the investment. Further, a VCT dividend is not treated as income for income tax purposes and gains are exempt from capital gains tax.
Individual savings accounts
An individual can invest up to £20,000 in an individual savings account (ISA) either in cash or stocks and shares. Either type of investment can be made by UK resident individuals aged 18 or over, but the cash-only ISA is available to those aged 16 or more.
Junior ISAs – for children aged below 18 – have a lower limit of £9,000 for 2020/21.
If the child gets more than £100 in interest from money given by a parent is treated as the parent’s for tax purposes. However, this rule doesn’t apply to money in a Junior ISA.
You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.
Gifts of up to £3,000 a year can be made without any inheritance tax implications. The allowance can be carried forward for one year, so if not used in the previous tax year 2019/20 a gift of £6,000 could be made on or by 5 April 2021.
Remember each tax year, you can also give away:
• wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
• normal gifts out of your surplus income, for example Christmas or birthday presents - you must be able to maintain your standard of living after making the gift
• payments to help with another person’s living costs, such as an elderly relative or a child under 18
How we can help
If you require assistance or tax advice, please contact a member of our team on 0333 772 7753 or email [email protected]
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