End of Year Tax Planning
Current Issues | Tax | 9th March 2013
Individuals and trustees may wish to consider action before 5 April 2013 on the issues below, to save or delay tax liabilities.
Timing of income and deductions
If your income is over £100,000, your personal allowance is reduced by £1 for every £2 over £100,000. So, for 2012/13, you will lose your personal allowance entirely if your income exceeds £116,210. For 2013/14 the threshold will be £118,880. The effect is a 60% income tax rate if your income is in the band between £100,000 and these thresholds.
If you are not domiciled or not ordinarily resident in the UK and are taxed only on remittances of overseas income and gains, you do not get the personal allowance, unless your unremitted overseas income and gains total less than £2,000.
The basic rate band, above which income tax is charged at 40%, is being lowered to £32,010 for 2013/14. For anyone with taxable income of over £32,800, this more than offsets the benefit of the increase in the personal allowance from £8,105 to £9,205. The 50% tax rate (42.5% on dividends) still applies if your income is above £150,000 for 2012/13, but will fall to 45% for 2013/14 (37.5% on dividends). So if you are affected, there could be an advantage in deferring income, which also delays meeting the tax liability. This is relevant both to individuals and trustees of discretionary trusts.
Conversely, where possible, reliefs that reduce your taxable income, such as donations to charity and pension contributions, should be secured in 2012/13 rather than later, particularly if relief at 50% is available. Married couples and civil partners should ensure that both make use of their personal allowance, basic rate tax band and 40% band where possible.
Pension inputs are contributions by you and your employer to your ‘pension arrangements’, including accrual of benefits in defined benefit (‘final salary’) schemes. The radical changes in the tax relief system for pensions makes it important to review your pension arrangements, especially if you are still in a defined benefit scheme. Tax relief for your pension inputs for ‘pension input periods’ ending after 5 April 2011 is limited to £50,000, increased by any amounts by which pension inputs in the previous three years fall short of £50,000 a year. The £50,000 limit is to fall to £40,000 from 6 April 2014, and it is feared that tax relief for pension inputs will be confined to basic rate.
Unless your marginal tax rate will be higher for 2013/14, it is better to give by 5 April 2013 rather than later. This applies not only to gift aid donations, but also to gifts of listed securities and land, where these qualify for income tax relief. As a ‘fall-back’ you may elect to treat gift aid donations made between 5 April 2013 and the date you file your tax return (but not later than 31 January 2014), as though they were made in 2012/13 for income tax purposes.
Timing of capital gains
Realising sufficient capital gains to utilise the annual exemption (£10,600 for 2012/13) is still worth considering. As mentioned above, non-UK domiciled individuals and those not ordinarily resident in the UK whose overseas income and gains are taxed on the remittance basis, do not get the annual capital gains tax (CGT) exemption unless unremitted overseas income and gains are less than £2,000.
It may be worth considering deferring a disposal which gives rise to a capital gain (and which would take you over the annual CGT exemption) until after 5 April. This would mean that CGT is then payable a year later, on 31 January 2015, rather than 31 January 2014. Deferral may alsomean that you may become eligible for entrepreneurs’ relief, under which gains are taxed at 10% rather than 28%. If any assets have become of negligible value, you should consider a loss claim for CGT purposes. In some circumstances income tax relief may be available instead.
Selling shares or securities to realise a gain covered by losses or the annual exemption and then buying the same shareholding within the next 30 days is caught by the anti-avoidance rules designed to prevent this so-called ‘bed and breakfasting’. However, these rules do not apply to shares ‘reacquired’ by your spouse or ISA.
Enterprise Investment Scheme (EIS)deferral relief may enable you to postpone tax on a gain which has already been made until disposal of the EIS shares. Relief is given for share subscriptions in EIS-qualifying companies up to three years after the earlier disposal.
Gains arising in 2012/13 on disposal of other assets that are re-invested in that year in SEIS qualifying shares are exempt.
High value UK residential property
Owners of UK homes valued over £2m held through companies (both resident and nonresident) may wish to review the position in view of the proposed annual tax charge from 1 April 2013, and consequent 28% CGT on realised gains calculated with reference to any increase over 5 April 2013 market value.
Consider the following tax-aided investmen opportunities:
Individual Savings Accounts (ISAs)
No tax is payable on income and gains on investments within an ISA. You can invest up to £11,280 in total in 2012/13 (increased to £11,520 in 2013/14), of which up to half may be invested in a cash ISA. You may only contribute to one cash ISA and one stocks & shares ISA in any tax year.
Venture Capital Trusts (VCTs)
Income tax relief at 30% (or, if less, the amount of your income tax liability) is available on up to £200,000 subscribed for shares in VCTs if the shares are held for at least five years. Subject to limits on the size of holdings, dividends and gains relating to VCTs are exempt.
Enterprise Investment Scheme (EIS)
Income tax relief at 30% (or, if less, the amount of your income tax liability) is available in 2012/13 on up to £1,000,000 subscribed for shares in qualifying companies, provided you are not 'connected’ with the company. Any gain on their sale is exempt from CGT, if the shares are held for at least three years. Up to a further £500,000 may be subscribed in 2012/13 and claimed in 2011/12 if EIS relief was not fully used in that year. Furthermore, CGT on a gain realised up to three years earlier may be deferred by a subscription for shares in qualifying companies, even if you are ‘connected’ with the company.
Seed Enterprise Investment Scheme (SEIS)
This is a new scheme available for shares issued by smaller companies. A maximum of £100,000 subscribed can attract 50% income tax relief (or, if less, the amount of your income tax liability), which is withdrawn if the shares are realised within three years. Any gain on their sale after three years is exempt from CGT.
There are a number of exemptions for lifetime gifts that do not depend on surviving case with inheritance tax (IHT). You can give up to £3,000 each year ending 5 April, together with any part of that ‘allowance’ not used in the preceding year. In addition, you can give up to £250 outright to any number of recipients each year. There are special exemptions for gifts made in consideration of marriage or civil partnership; £5,000 for each of the parents of the couple, £2,500 for each grandparent or remoter ancestor, and £1,000 in other cases.
One important exemption that should not be overlooked is that for regular gifts out of income. Such gifts are exempt without upper limit provided your remaining after-tax income is sufficient to maintain your usual standard of living. Despite the change in the IHT treatment of gifts into trust, a trust may be a suitable vehicle to receive such gifts.
Lifetime gifts of assets likely to increase in value are also worth considering, as any further growth in value during your lifetime is outside your estate, even if you don’t survive seven years. Bequests to charity on death are already wholly exempt. Furthermore, if bequests to charity on a death after 5 April 2012 are at least 10% of the amount otherwise chargeable at 40%, the tax rate on the balance will be reduced to 36%. In some circumstances this actually makes lifetime gifts to charity less tax-efficient.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.