Use your allowances before 5 April 2021!
The UK tax year ends on 5th April and so the remaining weeks can provide a last-minute chance to save some tax with a bit of careful end of year tax planning. Here are some ideas for maximising your tax efficiency.
If you earn £100,000 or more, your tax-free personal allowance falls by £1 for every £2 you earn over £100,000. Therefore, if you earn £125,000 or more, you will not receive a tax-free personal allowance at all. The additional rate income tax (45%) is also charged on earnings of over £150,000. Pension contributions and moving investments to a lower-rate tax-paying spouse could reduce this liability.
If your spouse is a lower or non-taxpayer, it’s possible for them to transfer 20% of their unused personal allowance to their partner which could save up to £250 in tax.
Also, if you have income-producing assets (for example, buy-to-let property or even saving accounts), you could put these in the lower or non-taxpaying spouse’s name to lower your overall Income Tax liability. Assets can be passed between spouses without any Capital Gains Tax (CGT) liabilities.
The tax-efficient ISA allowance for the current tax year is £20,000 per person. Therefore, a married couple can invest £40,000 before the end of the tax year on 5 April. You can also add in any administration charges paid on a stocks and shares ISA last tax year, which can boost the allowance considerably. There is no CGT and no tax on UK income and no need to declare this on your tax return. If you do not make use of your ISA allowance it cannot be carried forward, so it’s a case of use it or lose it!
The standard annual pension allowance is 100% of earned income or £40,000, whichever is higher, in the current tax year. This is reduced if your income exceeds £240,000 or you have taken pension benefits via Flexi-Access Drawdown previously. However, if you are a higher-rate or additional rate taxpayer and have enough relevant UK earnings, you can claim the extra tax relief. You can also carry forward any unused annual allowance from the three previous tax years, so long as you were a member of a registered pension scheme for the years for which you wish to maximise contributions. A pension contribution could in fact be a way of restoring your personal allowance, if your earnings exceed £100,000.
Consider saving up to £3,600 into a pension for your spouse, civil partner or a child, even if they have no earnings of their own, to obtain basic rate tax relief on the contributions. Provided you can show that the contributions are made out of income then they wouldn’t count against your £3,000 annual inheritance tax allowance for gifts.
You have an annual CGT allowance that currently enables you to make gains on investments of up to £12,300 free of tax. Any gains in excess of the allowance are charged to CGT at either 10% or 20% with disposals of residential property being taxed at 18% or 28%, depending on the your other total taxable income in the year in which the gain arises. Married couples may be able to use each other’s allowances by transferring assets before they are sold.
From 6 April 2020, we saw some significant changes to the CGT regime in respect of the disposal of residential property and a reduction in the reliefs that may be available.
Private Residence Relief has been restricted and lettings relief abolished in the majority of cases, after this date. There is now a requirement to report the capital gain and pay the associated tax due within 30 days of completion and significant penalties could be charged for non-compliance.
Another rather subtle change which was also introduced with effect from 6 April 2020 is in relation to property transfers between spouses or civil partners where the recipient spouse now inherits the transferring spouse’s ownership history irrespective of whether it is their main residence at the time of transfer. This can have an adverse or favourable effect depending on the circumstances of the couple. As a result of this change, when considering the transfer of a property, the ownership history of the transferring spouse needs to be taken into account. It may also be worth considering selling an asset to crystallise a capital loss before any potential property sale as a means of reducing CGT payable.
You should also consider using your annual gift allowance of £3,000. Although you can carry this forward for one year, it is then lost if it is unused. You may have an unused gift allowance for 2019/20 which can still be used until 5 April 2021.
The new ‘residence nil-rate band’ (RNRB) now enables a ‘family home’ to be passed wholly or partially tax-free on death to direct descendants. This extra tax-free amount has been phased in over four years, initially at £100,000 for 2017/18, rising each year to reach £175,000 each in 2020/21. The RNRB is in addition to an individual’s own nil-rate band; currently £325,000 per individual. The rules surrounding the RNRB are complex and the deceased may be entitled to RNRB despite not owning a ‘family home’ on death. The amount of RNRB that is actually due to the estate starts to be withdrawn where the value of the estate on death exceeds £2m. When the value of the estate reaches £2.35m no RNRB is due. You may wish to consider making gifts either directly, or into a suitable trust, to reduce your estate beneath this threshold.
The Enterprise Investment Scheme (EIS), Venture Capital Trusts (VCT) and the Seed Enterprise Investment Scheme (SEIS) are worth a thought. EIS investments offer an Income Tax credit and CGT deferral. The tax credit, whilst not a relief as such could also be a way of offsetting the loss of personal allowance on income above £100,000, if a pension contribution is not viable. You would need to be comfortable with the associated higher level of investment risk, as these are invariably investments into small or start-up companies.
A number of the outlined strategies are less than straightforward and you should seek professional advice before embarking on any course of action. As ever we will be glad to hear from you, if you’d like to run a query by us.
The most important bit of advice I can give, notwithstanding all of the above, is stay safe!