End of year tax planning
From Shipshape March 2017 | Uploaded 10th March 2017
As we approach the tax year-end on April 5, it may be possible to choose the tax year that your income, gains or reliefs fall into. This can affect the tax rate, and therefore the amount of tax payable, and the date it needs to be paid.
Income and gains
With marginal rates and tax bands expected to be very similar next year, the timing of liabilities will be the main issue to consider.
Residential property landlords
Income tax relief for a quarter of the interest costs of residential property landlords will be at only 20% if met in 2017/18, rather than at their marginal rate in 2016/17. This will also apply to interest on loans used to provide capital for partnerships letting residential property.
Unless your marginal tax rate will be higher for 2017/18 it’s better to make any pension contributions by 5 April 2017, subject to the maximum allowance for that tax year. Unless your income exceeds £150,000 this is £40,000, plus any unused relief from the previous three years. However, pension inputs for those in ‘drawdown’ are limited to £10,000 a year. If your income exceeds £150,000, the £40,000 allowance is reduced by £1 for every £2 of that excess, down to a minimum allowance of £10,000. The ‘lifetime allowance’ is a limit on the value of your pension fund that can enjoy favourable tax treatment. There are a number of elections which can result in a higher lifetime allowance than the latest figure of £1m (see protect your pension pot, page 4). Anyone who has an election in place requiring no further pension contributions should beware of being automatically included in a workplace pension scheme.
Unless your marginal tax rate will be higher for 2017/18 it’s better to do any charitable giving by 5 April 2017. This applies to gift aid donations and to gifts of listed securities and land, where these qualify for income tax relief. You may elect to treat gift aid cash donations made between 5 April 2017 and the date you file your 2017 tax return, but not later than 31 January 2018, as though they were made in 2016/17 for income tax purposes.
Conversely, the recent changes to the taxation of dividends and interest may result in many people having a tax liability only because of gift aid donations. This is because if the tax recoverable by charities on your cash donations exceeds the tax on your income and gains for the year you have to meet the shortfall. Anyone who might be caught should consider withdrawing gift aid declarations at least temporarily, and then re-issuing them if their income and gains later prove to be sufficient.
If you’re a non-dom, you’ll see major changes to your income tax, capital gains tax (CGT) and inheritance tax position from 6 April 2017. Trustees, settlors and beneficiaries of offshore trusts should also be aware of the changes. Both are summarised here: www.shipleys.com/resources/issue/non-resident-trusts
Deferring a disposal that results in capital gains in excess of the annual CGT exemption (£11,100 for 2016/17) until after 5 April would mean that CGT is payable a year later.
Deferral might also mean that you become eligible for entrepreneurs’ relief, where gains are taxed at 10% rather than 20%, if the condition for the relief that the asset must have been held for at least a year is then met. The ‘lifetime limit’ on gains which can qualify for entrepreneurs’ relief is £10m for disposals made after 5 April 2008.
Assets of negligible value
If any of your assets have become of negligible value, consider a loss claim for CGT purposes. In some circumstances income tax relief may be available instead.
Bed and breakfasting
Bed and breakfasting – selling shares or securities to realise a gain covered by losses or the annual exemption and then buying the same shareholding – is caught by anti-avoidance rules if the purchase takes place within the next 30 days. However, these rules don’t apply to shares ‘reacquired’ by your spouse or through your Individual Savings Account (ISA).
Employee ownership trusts
Disposals of shares that result in a controlling interest in a company being held by an employee ownership trust are exempt from CGT.
There are a number of exemptions for lifetime gifts that don’t depend on surviving at least seven years. You can give up to £3,000 each tax year, together with any amount not used in the preceding year. In addition, you can give up to £250
to any number of individuals each year.
Regular gifts out of income are exempt without a limit, provided your remaining after-tax income is sufficient to maintain your usual standard of living.
Don’t forget that gifts can result in a CGT liability.
EIS and SEIS
Income tax relief at 30% is available on up to £1m each tax year subscribed for shares in qualifying Enterprise Investment Scheme (EIS) companies, provided you are not ‘connected’ with the company. Any gain on the sale of EIS shares is exempt from CGT if they have been held for at least three years. £500,000 may be subscribed in one tax year and claimed in the preceding tax year if EIS relief wasn’t fully used in that year.
Income tax relief at 50% is available on up to £100,000 each tax year subscribed for shares issued by smaller companies qualifying for Seed Enterprise Investment Scheme (SEIS) relief. Provided the shares are held for at least three years, any gain on their sale is exempt from CGT. CGT on a gain may be deferred by subscribing for shares in qualifying EIS or SEIS companies in prescribed circumstances.
Income tax relief at 30% is available on up to £200,000 each tax year subscribed for shares in Venture Capital Trusts (VCTs), provided the shares are held for at least five years. Subject to limits on the size of holdings, dividends and gains relating to shares in VCTs are exempt.
The new ‘investors’ relief’ applies to those who subscribe for shares in trading companies whose investment will not be eligible for entrepreneurs’ relief. Capital gains realised on disposal of qualifying shares which must be held for at least three years) will be taxed at 10%, up to a lifetime limit of £10m.
Income tax relief at 30% is available on investments (up to £1m) in ‘social enterprises’.
No tax is payable on income and gains on investments within an ISA. You can invest up to £15,240 in total in 2016/17, but this is set to rise to £20,000 in 2017/18.
A surviving spouse or civil partner who inherits an ISA from a partner with whom they were living at the time of the death may claim an extra ISA allowance equal to the value of ISA holdings of the deceased.
The new ‘help to buy’ Lifetime ISA is now available for those saving to buy their first home. Those aged between 18 and 40 may save up to £4,000 a year until they reach the age of 50, and receive a government bonus of 25% on their savings. The money can be invested as cash or in stocks and shares, as with ISAs. It may be used towards the cost of a first home worth up to £450,000 or taken out tax-free after the investor is 60.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to the above. If you would like advice or further information, please speak to your usual Shipleys contact.