As the tax year end approaches… so do opportunities for the new tax year

As 5 April 2019 approaches it presents an opportunity to consider taking advantage of tax allowances and reliefs, available both before the end of the current tax year and at the start of the new tax year.  Here we highlight some of the more significant planning opportunities for consideration.

Maximise your Individual Savings Account (ISA) allowances

ISA contribution allowances operate on a tax year basis with no carry forward of any unused allowance. There are several important tax benefits applying to ISAs:

• Interest earned on cash or fixed interest securities is free of UK income tax

• Dividends are also free of UK income tax

• Capital Gains are free of UK capital gains tax (CGT)

• There is nothing to report on your Tax Return

• ISAs can now be inherited by a surviving spouse or civil partner, thereby preserving the valuable tax free income and gains. This is achieved by giving the survivor an additional ISA allowance equal to the value of the deceased spouse or civil partner’s ISA at the date of death.

The maximum annual contribution to ISAs is £20,000 each year; for those who do not have new money to invest, non-ISA investments can be sold and reinvested into an ISA. However, doing this may generate taxable capital gains and a discussion should always be had with your adviser in the first instance.

Tax efficient pension contributions

Those building up a fund for retirement should consider making a tax efficient pension contribution; such contributions receive income tax relief at between 20-45% and once in the pension, grow free of income and capital gains tax.

• Non-earners can contribute £3,600 gross into a pension and receive 20% tax relief – these contributions can be funded by a third party

• The maximum tax efficient pension contribution is £40,000 each tax year (subject to earnings)

• This is scaled back if total income exceeds £150,000 with the potential to reduce the annual allowance to a £10,000 minimum contribution

• It is possible to catch up on contributions that have not been paid in previous years; the carry forward is limited to the last three tax years.

A pension strategy which relies on occasional large, one-off contributions is best avoided in favour of regular contributions made throughout your working life. However, if you are self- employed and have a fluctuating income a one off contribution at the end of the tax year can be a useful planning exercise.

Capital Gains Tax (CGT)

Regular management of CGT exposure is a key element of personal financial management, particularly whilst the rate of CGT remains at a relatively low level.

• Regular use of the annual CGT annual exemption (£11,700, rising to £12,000 in 2019/20) is one way to avoid large gains building up within your investment portfolio

• The timing of disposals is important – the gain realised on Friday 5 April 2019 will mean tax is payable on 31 January 2020. A gain realised on Monday 8 April 2019 will move the tax payment date to 31 January 2021

• Care is also appropriate with the timing of any realised losses. Losses realised during a tax year are first set against gains made in the same year before the annual exemption is applied.  Avoid making losses in the same year as the one in which you realise gains unless the gains exceed the annual exemption

Inheritance Tax (IHT)

IHT receipts have been growing steadily in recent years.  This tax year’s IHT payments are projected to be £5.5bn, over double the amount raised eight years ago.  There are three main yearly exemptions to be considered prior to the end of this tax year:

• Annual exemption – each year you can give away £3,000 free of IHT. This exemption is available for carry forward, in whole or in part, but only to the following tax year

• Small gifts exemption – you can give up to £250 outright each tax year, free of IHT, to as many people as you wish

• Normal expenditure – this is potentially the most valuable of the yearly IHT exemptions. Any gift is exempt from IHT provided that:
  
  
  • You make it regularly
  
  
  • It is made out of income (including ISA and other tax free income)
  
  
  • It does not reduce your standard of living
  
  
  

There are no cash limits to the normal expenditure exemption.  You can gift dividend or other investment income, which would otherwise usually be reinvested, with the normal expenditure exemption covering the gift.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) 

For sophisticated investors with significant tax liabilities, these investments offer the opportunity of a variety of tax reliefs.

• Income tax relief at 30% on the amount of investment (you must hold the investment for a qualifying period, either three or five years)

• No capital gains tax on disposal

• IHT relief after two years’ of ownership – EIS only

• Tax free dividends – VCT only

These are investments in growing companies, inherently higher risk, and should represent only a small part of a well-diversified investment portfolio.

In conclusion

A regular review of your overall financial circumstances will highlight these and other planning opportunities. For further information and to discuss tax efficient planning, please get in touch with your usual Brown Shipley adviser or contact us now.

Roger Clark

Head of Wealth Management

Roger has extensive client facing and business management experience and provides advice across all aspects of our clients’ financial affairs, including risk management, investment, retirement solutions and estate planning.