It’a a new dawn, it’s a new day,
it’s a new tax year…
– but are you ‘feeling good’ about your tax planning?
It really is crucial, especially in today’s economic climate, to ensure your personal and business tax affairs are in the best possible shape.
With 6 April 2014 fast approaching, now is the perfect time for you to review your personal finances, make the most of available tax reliefs and tax-efficient investment opportunities and reduce your future exposure to tax liabilities.
This document represents a simplified and summarised list of some general tax planning opportunities available. As with all general advice, specific exclusions may apply to individual circumstances, so please be sure to take advice before acting on any of the suggestions.
If you would like any more information, or our assistance in shaping a plan that identifies your tax planning opportunities and builds in the bigger picture of your personal and business priorities to enhance your own, your family and your business’ future financial security, please get in touch with your usual contact at BKL. We’re always on hand to help.
With the top rate of income tax now at 45%, it is more important than ever to try and mitigate this.
- The individual personal allowance is £9,440 in 2013-2014. For taxpayers with an income of more than £100,000, £1 of the personal allowance is withdrawn for every £2 above £100,000 in income, until it is completely withdrawn. This means, if you have income in excess of £118,880, you will no longer have a personal allowance.
- For people aged 65 or over, the personal allowance is £10,500 and for those aged 75 and over, it increases to £10,660. In this case, if income exceeds £26,100, the personal allowance is reduced by £1 for every £2 above the £26,100 limit until the basic allowance is reached.
- Children have their own personal tax allowance, in the same way as adults.
For couples (i.e. married or in a civil partnership), “shifting” income so it accrues to the partner with the lower tax rate is sometimes worth considering. Some options are set out below:
- Where couples jointly own an income-generating asset, each is taxed on 50% of the income, even where the asset is owned in unequal shares, unless an election is made for income to be taxed in proportion to the underlying capital ownership. So simply putting property into joint names can sometimes save tax.
- This rule does not apply to dividend income from jointly owned shares in close companies (broadly, those owned by five or fewer people) which is always split according to the actual ownership of the shares.
- If, for tax purposes, it is beneficial for one partner to be taxed on all the income from an income-generating asset, full beneficial ownership must be transferred to them. This may give rise to inheritance tax (IHT) and capital gains tax (CGT) implications, particularly for non-married couples.
- Introducing a spouse as a business partner, or giving them shares in a company will normally be effective in “shifting” a proportionate share of income subsequently arising.
- A business owned by one partner in a couple can employ the other partner provided the wage or salary is commensurate with the work actually done. All appropriate employment law and payroll obligations must be observed. Pension contributions and other benefits could be added to the package, and provided the total remuneration package (salary, benefits, pension contribution) does not exceed the market rate salary for their role, the business will be able to claim a tax deduction for the total cost against its profits.
- Parents can transfer income-producing assets to an unmarried child aged under 18, but the parent will be taxed unless the income is less than £100 a year. Gifts by grandparents or gifts to children aged 18 or over are not affected by this rule.
- A business owned by a parent can employ the child (subject to the same limitations described above in relation to employing partners).
- There is no tax payable by either child or parent on income paid on a Child Trust Fund or Junior ISA investment, even if the parent has provided the invested money.
- A parent can put money into a personal pension for a child. Even if the child has no income, the parent can pay in up to £2,880 a year, which becomes £3,600 with tax relief.
There are various options for extracting profits from a company:
- Salary: the salary can be deducted from the taxable profits of the company (and can also be set at a rate that makes this efficient from a national insurance point of view).
- Dividends: no national insurance is payable on dividends and the income tax rate on dividends is lower than for other income sources. However, the company cannot claim corporation tax relief on dividends.
- Bonuses: where payable, an annual bonus must be declared before the company year-end, even if the amount has not been finalised. The bonus and employer’s national insurance payable on it is deductible for corporation tax purposes for the period in which it is charged in the accounts, provided it is paid within the nine months following the end of the accounting period.
- Benefits in kind: tax-efficient benefits in kind include a company mobile phone and a low emission company car.
- Pension contributions: where pension contributions for a director shareholder are made by the business, provided their total remuneration package does not exceed the market rate salary for their role, the business can claim a tax deduction for the cost against its profits. The annual pension contribution limit is now £50,000, although unused allowances from the previous three tax years can be brought forward tax-free.
Over its entire lifetime, a business will pay tax on the whole of the profits made from start to finish, regardless of the date to which accounts are drawn up. But in some circumstances, a judiciously-timed change in the date can provide a cash-flow advantage. But because businesses are not usually permitted to change their accounting date more than once every five years, such changes must be thought through very carefully.
If you have interests in a number of businesses, consider appropriate structures. Separate companies, divisions, LLPs and groups all have their own possible advantages and drawbacks. There is no “one size fits all” solution but bespoke planning can be very worthwhile.
Tax-efficient investment vehicles can be a useful tool in tax planning. Some options you might wish to consider are:
Up until 5 April 2014, you can pay a total of £11,520 into a stocks and shares ISA (of which £5,760 can be in a cash ISA) and enjoy the potential for tax-efficient gains on any income or capital growth. Furthermore, from 6 April 2014, this limit will increase to £11,880, resulting in the ability to invest a total of £23,400 into these tax-efficient vehicles.
You can also shelter up to £3,720 for your child in a tax-efficient Junior ISA before 5 April 2014.
If you have income from employment or self-employment, tax relief is available on pension contributions up to the annual limit of £50,000 a year.
- as a 45% tax payer, you can currently save £50,000 in your pension for a net cost of £27,500;
- even if you have no income from employment or self-employment or indeed no income at all, you can contribute up to £2,880 a year to a pension and HMRC will “top up” the contribution to £3,600 by adding tax relief.
Note that this annual allowance is set to reduce to £40,000 from 6 April 2014.
It is also possible to bring forward unused allowances from the three previous tax years (a maximum of £240,000).
Recent years have seen a relaxation of the rules for how benefits can be taken. This will enable more flexible access to your savings.
These are higher risk schemes that offer tax relief benefits on investments in smaller and growing businesses – for a summary of the key reliefs, please refer to the table below:
Summary of key reliefs for EIS, Seed EIS (SEIS) and Venture Capital Trusts (VCTs)
|Investment amount||Up to £100,000||Up to £1,000,000||Up to £200,000|
|Type of business invested in||Unquoted trading companies, running a qualifying business, with gross assets less than £200k and fewer than 25 employees.||Unquoted trading companies, running a qualifying business, with gross assets less than £15m, and fewer than 250 employees.||A trust that invests across a range of trading businesses listed on the London Stock Exchange (not AIM).|
|Income Tax relief||50% upfront income tax relief of the amount invested in new shares.
(i.e. a £100,000 investment costs £50,000.) By election, it is possible to carry back an SEIS investment to the prior tax year. Dividends paid on SEIS Shares are taxable.
|30% upfront income tax relief of the amount invested in new shares.
(i.e. a £100,000 investment costs £70,000.)By election, it is possible to carry back an EIS investment to the prior tax year. Dividends paid on EIS Shares are taxable.
|30% upfront income tax relief of the amount invested in new shares.
(i.e. a £100,000 investment costs £70,000.) There is no provision to carry back the investment to a prior tax year.Dividends are exempt from income tax provided VCT investments held for 5 years.
|Can HMRC claw back Income Tax relief?||Yes – if the shares are sold within three years, or if the company loses its SEIS status within that timeframe.||Yes – if the shares are sold within three years, or if the company loses its EIS status within that timeframe.||Yes – if the shares are sold within 5 years.|
|Capital gains tax (CGT) relief||Tax free capital growth: gain on disposal of shares is tax free, provided shares held for 3 years.||Tax free capital growth: gain on disposal of shares is tax free, provided shares held for 3 years.||Tax free capital growth: gain on disposal of shares is tax free, provided shares held for 5 years.|
|Deferral of Capital Gains||The tax due on a gain on any asset can be deferred by rolling the proceeds into SEIS shares and then be completely exempt from capital gains tax.||The tax due on a gain on any asset can be deferred by rolling the proceeds into EIS shares (reinvestment can be up to 12 months before or within three years of generating the gain).||No deferral relief.|
|Loss relief||Loss relief against income or capital taxes of the year of disposal if the investment fails.||Loss relief against income or capital taxes of the year of disposal if the investment fails.||No relief available.|
|IHT – Business Property Relief||100% relief from inheritance tax: provided the investment is held for two years.||100% relief from inheritance tax: provided the investment is held for two years.||No relief available.|
Please note that these are illiquid investments, involving varying degrees of risk associated with the business(es) being invested in, and so may not be suitable for every investor.
We would recommend you take advice from an authorised firm before making any investment, bearing in mind your attitude to risk, timescales for investing and your existing financial plans, all of which may affect your ability to make a tax-efficient investment.
Do remember that investments such as these can go down as well as up in value, so you could lose some or all of your original investment.
Past performance should not be taken as a guide to future returns.
Capital gains tax (CGT) can involve some substantial sums, so one of the most useful steps you can take is to seek our advice in calculating your current exposure to CGT and discuss your options for restructuring your affairs to reduce your liabilities.
- The tax on capital gains is either 18% or 28% depending on your marginal rate of tax.
- Each individual has an annual CGT tax-free allowance (£10,900 in 2013-2014). In selling assets, married couples and civil partners can make the most of their CGT allowances by making sure that the assets are jointly owned or by transferring assets immediately before sale to ensure that the gain arises to the most appropriate person.
- Entrepreneurs’ relief reduces the CGT rate (28% for taxpayers at the higher or additional rate) to 10% on the disposal by an individual of a business, assets of a business or shares in a company, if certain conditions are met.
- There is a maximum lifetime limit to the amount of gains that can be reduced by entrepreneurs’ relief, set at £10 million for qualifying disposals on or after 6 April 2011.
- Usually (but not always) there will be no CGT on the sale of your main home. If you own more than one home, you can elect which you wish to be treated as your main home, provided there is some evidence that you have lived there as your residence. You normally have two years in which to make the election. Once made, you can vary it at any time but it is important not to miss the initial opportunity to make the election.
If your joint estate is valued over £650,000, or individual estate over £325,000, any excess will be subject to a potential 40% tax liability, so as with CGT, it is sensible to regularly review your inheritance tax (IHT) planning to achieve the most favourable position.
- Since October 2007, any unused IHT allowance (the nil rate band) from a late spouse or civil partner can be transferred to the surviving spouse/partner. This can increase the IHT threshold of the surviving partner from £325,000 to as much as £650,000 in 2013-14; but if the surviving partner remarries, some estate planning work may be necessary to protect the unused nil rate band.
- Gifts of up to £3,000 can be made annually which will be exempt from IHT on death. If the allowance is not fully used in one year, the balance can be brought forward to the following year.
- From April 2012, anyone leaving 10% or more of their estate to charity will reduce the IHT rate on their estate from 40% to 36%: a worthwhile reason for reviewing your will.
- Effective planning of wills and use of trusts can also help mitigate the tax liability.
Offshore tax issues are often complex and require careful planning. The following changes, which took effect in April 2012, have made it prudent to review your tax position with expert advice.
- From 2012-13, the remittance basis charge rose from £30,000 to £50,000 for individuals who have been resident in the UK for at least 12 of the previous 14 years.
- A new investment relief, effective as of 6 April 2012, is designed to allow non-doms to remit funds to the UK in order to make investments into UK businesses without triggering a tax charge.
- A new statutory residence test was introduced in April 2013, designed to clarify the tax position of expatriates.
- The law on UK tax residence has largely been subjective, with the only definitive rule being that a person is UK-resident if they spend more than 183 days in the UK in a tax year.
- The new rules set out conditions qualifying someone for conclusive residence or conclusive non-residence, along with connections and day-counting factors to decide the status if they do not definitively fall into the residence/non-residence categories. Planning visits to the UK carefully and keeping close track of “days in hand” is likely to be even more crucial.