End of Year Tax Planning
Current Issues | Tax | 8th March 2018
As we approach the tax year-end (5 April) you may be able to choose the tax year in which your income, gains or reliefs fall. This can affect your tax rate, and therefore the amount of tax you have to pay, and also when it needs to be paid.
Income and gains
With marginal rates and tax bands remaining much the same for the new tax year, the timing of your liabilities will be the main issue to consider. It’s usually best to claim child benefit even if this is effectively paid back through the High Income Child Benefit Charge, as it’s the claim to the benefit that makes the year count for state pension purposes.
Unless your marginal tax rate will be higher for 2018/19 it’s better to make any pension contributions by 5 April 2018, subject to the maximum allowance for that tax year. Unless your income exceeds £150,000, this is £40,000 plus unused relief brought forward. This is the amount by which any contributions made by you and your employer into a pension scheme in the previous three years fell short of the annual limit. However, pension inputs for those in ‘drawdown’ are limited to £4,000 a year. Otherwise, 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.
If, when you come to take money from your pension, your pot is worth more than the lifetime allowance you will have to pay a special tax charge on the excess: 25% for income and 55% for lump sums. There are a number of elections you can make to benefit from a higher lifetime allowance than the latest figure of £1m (£1.03m from 6 April 2018). 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 2018/19 it’s better to do any charitable giving by 5 April 2018. This applies not only to gift aid donations but also to gifts of listed securities and land, where these qualify for income tax relief. However, you may elect to treat gift aid cash donations made between 5 April 2018 and the date you file your 2018 tax return, but not later than 31 January 2019, as though they were made in 2017/18 for income tax purposes.
Note that the changes to the taxation of dividends and interest may result in many people who previously were taxpayers, finding they now have a tax liability only because of gift aid donations. This is because the donor has to meet the shortfall if tax recoverable by charities on his or her cash donations exceeds that chargeable on the donor’s income and gains for the year. 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.
Some landlords may find themselves taxed on their net cash receipts from letting land and buildings in 2017/18. This will not always be preferable, so they may want to elect that it doesn’t apply.
Deferring a disposal that gives rise to a capital gain greater than the annual capital gains tax (CGT) exemption (£11,300 for 2017/18) until after 5 April means CGT would be payable a year later. Deferral might also mean that you become eligible for entrepreneurs’ relief or investors’ relief, where gains are taxed at 10% rather than 20%, because one of the conditions for entrepreneurs’ relief is that the asset must have been held for at least a year (three years for investors’ relief). The ‘lifetime limit’ on gains that can qualify for entrepreneurs’ relief is £10m for disposals made after 5 April 2008 and £10m for those that will qualify for investors’ relief (this relief only applies to shares issued after 16 March 2016).
If any 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’, i.e. selling shares or securities to realise a gain covered by losses or the annual exemption and then buying back the same shareholding, is caught by anti-avoidance rules if the purchase takes place within 30 days. However, these rules don’t apply to shares ‘reacquired’ by your spouse or ISA.
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. So giving sooner rather than later is often preferable. You can give up to £3,000 each tax year, and any part of this allowance not used in the preceding year. In addition, you can give up to £250 each to any number of people each year. Gifts of assets that grow in value can save inheritance tax (IHT) even if the donor dies within seven years, because the growth in value is in the recipient’s estate, not that of the donor.
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.
Non-doms and offshore trusts
Trustees, settlors and beneficiaries of offshore trusts should be aware of changes coming in from 6 April 2018.
Many long-term resident non-domiciliaries have been deemed domiciled for income tax, CGT and IHT purposes with effect from 6 April 2017. Others will become deemed domiciled from 6 April 2018 if they’ve have been resident for 15 out of the previous 20 tax years, or if they were born in the UK with a domicile of origin in the UK and are resident in the UK (for IHT if they were UK resident in the previous year as well).
The trustees of ‘settlorinterested’ offshore trusts may need to consider action before 6 April 2018 regarding loans to or by the trust, if the settlor has become deemed UK domiciled, in order to retain ‘protected’ status.
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 their sale is exempt from CGT if the shares are held for at least three years. £500,000 may be subscribed in one tax year and claimed in the preceding tax year if sufficient EIS relief remains unused 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 after three years is exempt from CGT.
CGT on a gain made in the period beginning 12 months before the subscription and ending 36 months after it may be deferred by making EIS or SEIS investments, even if you are connected with the company.
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.
Gains up to a lifetime maximum of £10m are taxed at 10%. Eligible gains are those realised by individuals, and in some instances trustees, on the disposal of interests in a business (trade, profession etc.), assets used for such a business, or shares in an unlisted trading company of which the individual is at least a 5% shareholder and an office holder, subject to a minimum ownership period. Those contemplating a disposal should ensure they qualify as gains are otherwise likely to be taxed at 20%.
Income tax relief at 30% is available on an investment (up to £1m) in ‘social enterprises’.
No tax is payable on income and gains on investments within an Individual Savings Account (ISA). You can invest up to £20,000 in total each year.
A surviving spouse or civil partner may claim an extra ISA allowance equal to the value of ISA holdings of a deceased partner with whom they were living at the time of the death.
The ‘help to buy’ Lifetime ISA is 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, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.