Top tips (and traps) for your tax return

Nearly half of all Self Assessment tax returns are filed in January. Senior Tax Manager Aidan Roberson takes a timely look at a few areas where clients can go wrong, potentially resulting in penalties or the prospect of engaging with HMRC to fix avoidable mistakes retrospectively.

1. Report capital gains on UK property, again

If you made a gain on a UK residential property, you will already have filed a capital gains tax ('CGT') return within 60 days and paid any tax due. However, this is a standalone return and does not automatically link up with your Self Assessment record, so HMRC require you to report the gain again on your personal tax return.

This is particularly important when you have other capital gains or losses in the year, as this will affect your tax liability.

2. Make the most of property allowances

If you are renting a property and have minimal expenses, you can claim an alternative ￡1,000 allowance instead of the actual expenses. This tends to be useful where a property has multiple owners, as each can claim the allowance. There are some restrictions on its use, though, so you should enquire with us about the availability of the relief.

3. Get property financing costs right

Tax relief for mortgage interest is given as a 20% tax reducer for residential properties, and so finance costs should not be deducted when arriving at your taxable rental profit. Note that this does not apply to commercial properties or furnished holiday lets which meet the relevant criteria.

Repayments of principal do not attract any tax relief and should be excluded from your tax return. However, arrangement fees are deductible which could provide you with additional benefit.

4. Claim relief on your pension contributions…

For higher rate taxpayers where pension contributions are not made via salary sacrifice, it is possible to obtain higher tax relief on these contributions by claiming these each year in your tax return.

5. …but be wary of tax charges on excess contributions

If your taxable income is over ￡240,000 per year, then you need to be wary of the tapering of the annual contribution allowance. The ￡60,000 annual cap can be reduced to as little as ￡4,000, which includes any employer pension contributions made on your behalf.

If you exceed the annual allowance, you need to report this on your tax return. This is because additional tax will be due as a clawback of the relief your pension provider will have claimed. However, to mitigate this, you may be able to consider unused allowances from earlier years.

6. Claim charitable donations

It you have made charitable donation on which you have claimed Gift Aid, and are a higher rate taxpayer, then you will need to report this on your tax return to obtain the tax relief.

If you are liable for a high marginal rate of tax (see below) then you can carry back relief for charitable donations made after the end of the tax year, but only when these are made before your tax return is submitted.

7. Be wary of the ￡100,000 trap

Although the additional rate of tax does not kick in until ￡125,140, between ￡100,000 and ￡125,140 of taxable income your personal allowance is tapered to nothing. This gives an effective marginal tax rate of around 60%.

If you can afford to make additional pension contributions (and have sufficient ‘relevant income’ to do so) to claw back some or all of your personal allowance, then this is extremely tax efficient.

Relief for pension contributions cannot be carried back from the current tax year to the previous one, so this is a planning point to look at before 5 April. However, as noted above, relief for charitable donations made after the end of the tax year can be carried back, so if you are in this position it is well worth doing so.

8. Reporting EIS/SEIS investments and losses correctly

There are generous income tax reliefs for EIS investments, and even more generous ones for SEIS investments.

Possibly the most generous relief is the exemption from capital gains tax if you sell EIS shares at a gain. However, you must claim the income tax relief for this to apply. Where you have insufficient income to create a tax charge you can disclaim all or part of your personal allowance to create one and allow income tax relief to be claimed.

If you have capital gains, then these can be deferred up to the value of your EIS investments. Be careful, though, as when you dispose of the shares then these deferred gains crystallise and you pay CGT at the tax rate at that time which may be higher than at present. SEIS capital gains relief is more generous, exempting 50% of the gain up to the value of the SEIS investment rather than simply deferring it.

EIS and SEIS investments are high risk and many fail. If they do, the capital loss can be converted into income tax relief. If you have losses since the end of the tax year, this income tax relief can be carried back into the previous tax year. However, the calculation of the loss must include the original income tax relief claimed when the investment was made.

Ask the experts

Tax returns must be completed correctly, and doing so at the outset will avoid you spending more time later correcting previously submitted tax return figures.

We can assist with this process and provide you with a detailed review the available tax reliefs, even in the most complex scenarios. We work to ensure that you are calculating the correct amount of tax payable.

Please do not hesitate to get in contact with us for advice on your complex tax affairs from one of our chartered tax advisers.