Happy Tax New Year

The focus on tax planning normally occurs at the beginning of the calendar?year and understandably reaches a climax towards the end of March. This is perfectly understandable as it is possible to make a fairly accurate prediction of taxable income for the tax year that will end on 5 April and just as importantly be aware of what funds are available to invest or contribute to a pension.

However, this does not mean that it is wise to leave all planning until late in the tax year especially when there could be a change of Government before the following 5 April. There is no harm in looking at the tax year ahead now and taking maximum advantage of planning opportunities.?

Below is a summary of some of the areas worth reviewing.

Married couples

If ?a couple are content to pool resources it is advisable to consider how investments and savings should be split to take advantage of the few allowances that are now available. First of all determine if one party to the marriage is likely to be a higher or additional rate taxpayer. Taxable income in excess of ￡50,270 results in being a higher (40%) taxpayer and taxable income in excess of ￡125,140 results in becoming an additional rate (45%) taxpayer.

If funds in excess of say ￡20,000 are available and both parties are basic rate taxpayers then if a deposit is made in joint names advantage can be taken of two personal savings allowances of ￡1,000 resulting in a maximum tax saving of ￡200 per person. If one party to the marriage is a higher rate taxpayer the savings allowance is ￡500 but this also reduces their tax liability by ￡200. Where one party is an additional rate taxpayer there is no savings allowance available but ensuring that the deposit is in the lower taxpayers name will reduce the tax liability especially where a substantial sum is to be held on deposit.

At this time of the year if a fixed deposit is made for a year then interest will not arise until the tax year 2025/26 and this may be attractive especially if income is likely to reduce that year maybe due to say a lower bonus or retirement.

A similar situation applies to dividend income in that placing shareholdings in the name of a non-higher/additional rate taxpayer minimises the tax charge and could mean both parties taking advantage of the ￡500 dividend allowance. The latter is now only ￡500 and it is really only of benefit to an additional rate taxpayer if they are sure that dividends arising in their name are not likely to exceed that amount greatly. If they do the liability is at the tax rate of 39.35 % which will likely undo the whole point of the exercise where the other party is a basic rate taxpayer whose dividends are only liable to tax at the tax rate of 8.75%

The position for capital gains tax (CGT) is more complex and decisions on how ownership is shared are best taken nearer the time of a disposal of the asset. It may of course mean undoing the planning taken to reduce the dividend tax charge. The price received for the sale of an asset is normally fluid so it can be? important not to let the tax planning interfere with a sale at an attractive price.

Individual Savings Allowance (ISA’s)

An investment in an ISA can take place at any time ?but the earlier in the tax year it occurs the greater the? income arising in the ISA in the tax year and hence the greater the tax saving. Married couples can each invest in an ISA and the limit of ￡20,000 per tax year? is generous. For those who prefer a cash ISA much has been made in the financial press recently that the rates of interest paid on a cash ISA are superior to those paid on cash generally.

From 6 April, you’ll be able to pay into multiple ISAs of the same type. Previously, you could split your ISA allowance between different types of ISA but were restricted to only one ISA of the same type each tax year.

The same principle as above applies to Junior ISAs, Lifetime ISAs and Help to Buy ISAs but the monetary limits are less. Also strict conditions apply on redemption.

An investment in an ISA is also free from Capital Gains Tax (CGT) so with the annual CGT exemption being reduced to ￡3,000 for individuals the CGT exemption within an becomes more valuable. Of course there are restrictions as to the instruments that a Stocks and Shares ISA can invest in so the investor’s attitude to risk and investment preference comes into play. The downside of an investment not being liable to tax in an ISA is that if a loss arises that loss cannot be set against gains liable to CGT. This may be worth bearing in mind if a more speculative investment is intended.

Pensions

Pension planning is normally best suited to the tax year end when details of taxable income are know and when it can be determined how much is available to contribute. Those in employment normally make regular monthly contributions but have the opportunity to top up at the tax year end.

However, if taxable income for the year ahead can be known with confidence and a large contribution is planned it might be preferable to ?spread the contributions evenly throughout the year or contribute early if it is considered that the investment(s) the premium is made in will appreciate in value.

For those who were? subject to the Lifetime Allowance Charge (LTA) it would be advisable to investigate what action, if any,? they can take now that the LTA has been formally abolished. It is an extremely complex area and it seems that the precise procedures are not yet in place but for some there may be the opportunity to extract? more tax free cash than was available under the LTA regime. Professional assistance is very much advisable.

The fact that there could be a change in Government before the tax year end and Labour have announced their intention to reintroduce the LTA makes attention to this issue well before April 2025 essential.

Carried interest

This is another area where the Labour party have indicated a desire to make change from the current taxation regime. Currently gains on carried interest can be taxed at a maximum? CGT rate of? 28% and in the past Labour have indicated that the gain should be liable to Income Tax at a rate of up to 45%. Obviously an ability to take action is dependent on liquidity and market conditions but clearly a review before a General Election would be sensible.

?Venture Capital Trusts

An investment? in a VCT up to ￡200,000 per tax year attracts 30% up front Income Tax relief ?if held for 5 years and exemption from CGT.

With the reduction in the annual CGT exemption coupled with the reduction in the dividend allowance the attraction of investments unaffected by either of these changes increases. So for those with the appropriate risk attitude who can afford to tie up capital for at least 5 years VCTs may appeal. Historically investment in VCTs tended to be confined to the early part of the calendar year but this has changed in recent years with the more popular VCTs being fully subscribed by the Autumn. Early investment does not always result in earlier tax relief but more importantly it may mean investing in a VCT favoured rather than choice being confined to those VCTS still? available at the end of March.

Unlike other tax efficient opportunities there is no ability to relate contributions to a previous year or carry forward unused relief. As with investment in an ISA no tax relief is available if a loss arises.

Inheritance Tax

This is not a tax normally mentioned in the context of tax year end planning but for many, particularly those in the South East it is a significant concern. Despite reports of the tax being scrapped late last year this seems extremely unlikely and particularly so under a Labour government.

Under the current regime one of the ways to avoid IHT is to make gifts during lifetime and survive the gift by seven years. That gift does not then form part of the donor’s Estate. Given that gifts tend to be made in the later years of the donor the earlier the gift the greater is the chance of survival for seven years.

Annual gifts of ￡3,000 per donor can also be made where the donor does not need to survive seven years before it is out of their Estate. Similarly gifts made out of normal expenditure can be made which leave the donor’s Estate immediately. Given that these gifts are by their very nature made from funds not required for day to day living they are likely to be made from savings. As such a gift early in the tax year can minimise the donor’s tax liability and may be liable to tax at a lower rate in the hands of the beneficiary. This is particularly so if a generation is missed and gifts are made to grandchildren and nieces/nephews who may not be liable to income tax because of their personal allowance.

Summary

With the freezing and in some instances significant reduction in allowances it is important to be aware of all the opportunities to maximise tax planning and minimise tax liabilities. Even if circumstances and funds do not permit taking action this early in the new tax year there is no harm in being aware of relevant opportunities and having an aspiration to take advantage of them when circumstances permit. There are doubtless other more complex areas where early planning is advisable but the above are just a few basic opportunities that may be appropriate.

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