With the herald of a new tax year comes the opportunity to take advantage over the next 12 months of the various tax reliefs, some having been ‘spring-cleaned’ by the Treasury for the new 2018/19 tax year.
By carefully considering the reliefs on offer, you could make a big difference to your overall tax liability.
Here are six specific tax planning areas to consider to kick-start your new tax year resolutions:
- Pension allowance
- Tax efficient EIS investments
- Charitable giving
- Inheritance tax (IHT) and gifting
- Capital Gains Tax
Use your annual pension allowance
Pension contributions are still a tax-efficient way of saving for retirement, with tax relief given at your highest marginal rate of income tax. Tax relief is restricted to the lower of the annual allowance, which is £40,000 for most people, or your net relevant earnings. It may also be possible to take advantage of your unused annual allowance from the three previous tax years.
This is a complex area as pensions are subject to a lifetime cap, increased with effect from 6 April 2018 from £1m to £1,030,000, as well as the application of potential restrictions for higher earners, so you should get specialist advice before making any contributions.
Make contributions to your ISAs
The ISA annual subscription limit remains at £20,000 per annum and the investment limit for junior ISAs for 2018/19 has increased to £4,260 per annum. A couple with three children (or grandchildren) may therefore invest up to £52,780 into the relevant ISAs in 2018/19, and benefit from an income tax and capital gains tax shelter on investments within the ISA wrapper.
Consider the timing of the contributions to ISAs in the tax year as making a last gasp contribution on 5 April 2019 could mean you don’t maximise the benefit of a whole year’s tax shelter offered by an ISA. The reduction to the tax-free dividend allowance for individuals from £5,000 to £2,000 from 6 April 2018 should also be borne in mind when deciding which investment vehicle you decide to use for investments.
Consider investing in tax efficient EIS investments
The Enterprise Investment Scheme (“EIS”) is a Government initiative that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies. From 6 April 2018, the EIS rules have been amended with the aim of encouraging investment in innovative companies, particularly those that are developing and exploiting new technologies. For EIS shares issued in the 2018/19 tax year, the annual limit on EIS investments for individuals is doubled from £1m to £2m, provided that any investment above the £1m threshold is invested in one or more of these ‘knowledge-intensive’ companies.
As EIS income relief is given in the form of a tax-reducer (at a rate of 30% of the EIS investment made) it is important to note that, to benefit from the full amount of income tax relief, the taxpayer must have an income tax liability for the year of subscription, which is equal to or greater than the EIS income tax relief. There is the ability to make a claim to carry back the EIS investment to the preceding tax year.
The 2018/19 tax year is also the last chance EIS investors have to defer capital gains which have previously been taxed at 28% so that when they are brought back into charge they are instead taxed at the current, lower rate of CGT of 20%. This can be done under the EIS capital gains tax deferral provisions, meaning investors may be able to defer gains realised in the last 3 years, or in the following 12 months, against a new EIS investment. Whilst only a deferral mechanism, as the deferred gain is crystallised on a future disposal of the EIS investment, the arbitrage between the old higher rate of CGT and the current lower rate of CGT can generate a real tax saving. This is subject to the rate of CGT increasing in the prevailing 3 year period. EIS investors will be aware that the EIS investment itself is exempt from CGT subject to a three year holding period.
As ever, there are a raft of conditions and considerations to be borne in mind before investing in EIS companies, not least the risk profile of such investments, and so specialist financial investment and tax advice should be sought before making any decisions in this regard.
Most people are fully aware by now of the tax benefit of making donations to charity either in the form of gift aid or by payroll giving. Making donations to charity in this way will mean that you can claim back the difference between the tax you’ve paid on the donation and what the charity got back when you fill in your Self-Assessment tax return, and so typically income tax relief at your marginal (top) rate of tax.
An aspect of charitable giving which many people are unaware of, however, is that you can get relief from both income tax and capital gains tax on land, property or shares you donate to charity. This includes selling them for less than their market value.
Finally, as the tax payment deadline starts to loom people often forget the fact that you can claim tax relief on your tax return for charitable donations paid immediately before filing the return, regardless of the fact that the donation has been made in the current tax year and not the previous tax year for which the return is being filed.
Inheritance tax (IHT) and gifting
Gifts of £3,000 can be made annually with no impact on the nil rate band of £325,000 or inheritance tax charge. If you don’t reach the £3,000 limit in one tax year, the balance can be carried forward, but only for one tax year. There is also IHT relief for gifts to any one person of up to £250 annually.
An often overlooked IHT relief is the IHT exemption afforded by making regular gifts out of excess income, which unlike other gifts made to individuals does not require the donor to survive seven years. For those of you who do have surplus income, this can be gifted to others or even used to make exempt transfers into trust. As ever, the devil is in the detail as various conditions have to be met and so specialist advice should be sought before proceeding with this.
Capital Gains Tax
There is an annual exemption for CGT of £11,700 for 2018/19 for individuals. Spouses/civil partners could consider transferring assets to ensure that they both utilise their annual exemption and also any gains above this being taxed so as to make maximum use of any unused income tax basic rate band, if one of them is a higher rate taxpayer.
As a final salvo, it may not seem long ago since you filed your last tax return, but there is nothing to stop you getting your next one done earlier in the new tax year. Planning ahead can save you last minute stress and avoid a fine if you get yours in late!
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.