10 tax points to consider before 5 April 2019
20th March 2019
Nicola Allen See profile
The end of the tax year is fast approaching, so what are those last-minute considerations to maximise your tax efficiency and use of allowances for the year? Here we give our top 10.
Every individual (if domiciled and resident in the UK), is entitled to a tax-free personal allowance for the year of £11,850, below which, no income tax liability arises.
If your total taxable income exceeds £100,000, this personal allowance starts to be reduced.
Every individual is also entitled to a tax-free dividend allowance of £2,000, and a tax-free savings allowance for interest income of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
Can you consider reorganising your income sources to make use of these allowances (this may be more a point for getting ready for the new tax year)?
If income is unbalanced in favour of one spouse, the other may not be making full use of their allowances (see above).
Or perhaps one spouse is a higher rate taxpayer and the other is a basic rate taxpayer. Is there an opportunity to adjust the ownership of assets to balance the income position – perhaps both could be basic rate taxpayers?
Transfers between spouses are not generally chargeable events for Capital Gains Tax or Inheritance Tax purposes, but do take care when considering any transfers of properties, as there could be unintended consequences affecting Stamp Duty Land Tax and availability of Capital Gains Tax reliefs.
Still largely under claimed, the Marriage Allowance was introduced in April 2015 and is available where both spouses were born after 6 April 1935 and both are basic rate taxpayers.
In these circumstances, if one spouse is not fully utilising their tax-free personal allowances (including the dividend and savings allowances mentioned above), they can claim the Marriage Allowance to transfer 10% of their personal allowance to their spouse – £1,190 for the 2018/19 tax year, which would represent a tax saving for the recipient spouse at 20%, of £238.
It is also still possible to backdate the claim to the commencement of the relief in the 2015/16 tax year, resulting in total tax relief of up to £900.
This is a permanent election that needs to be made directly with HMRC (the claim is not initially made on a tax return) here https://www.gov.uk/marriage-allowance. It can be cancelled in a later year if you cease to meet the criteria.
This is not something that will be available to everyone, but are you able to control the timing of income that you are due to receive, company bonuses or company dividends for example or the encashment of an investment bond or life policy?
It may be beneficial to consider deferring income into the following tax year, perhaps if income is expected to be lower in the following year and you can make use of a lower rate of tax, or to ensure your income is within the £100,000 limit when the personal allowance starts to be restricted.
If you are a higher or additional rate taxpayer, making a gift of cash to a UK registered charity (and ensuring you tick the gift aid declaration) can reduce your tax liability. This can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000.
When you make a cash gift to a charity under the gift aid scheme, this is treated as being made net of basic rate tax at 20%. The charity then reclaims the tax from HMRC. For example, if you make a donation of £80, the charity then reclaims a further £20 from HMRC.
Where you pay tax at 40% or 45%, you can claim additional tax relief through your tax return, so that you effectively only pay 20% tax on income up to the gross value of the donation, rather than at the higher rates as you normally would. Continuing with the example above, as a 40% taxpayer, by making a donation of £80, the charity will receive a further £20 from HMRC, and you will receive relief through your tax return of another £20. The charity therefore receives £100, but the cost to you is just £60.
You can actually make your gift aid donation after the end of the tax year and claim to carry it back to the 2018/19 year, as long as the donation is made before you submit your tax return for 2018/19 and the claim is included on your original return (you cannot claim this on an amended tax return).
This is effective in a similar way to gift aid donations, except sadly there is no carry back facility.
When you make a personal pension contribution, this is net of basic rate tax at 20%. If you are a higher or additional rate taxpayer, you can claim further tax relief through your tax return, so that you pay less tax at the higher rates and you reduce the effective cost of the contribution.
Again, this can also be effective in reducing your taxable income for the calculation of your entitlement to the tax-free personal allowance if your total income exceeds £100,000.
This is however, a very complex area and dependent upon your level of income, there are set rules as to how much you can contribute during a tax year and obtain tax relief, so do be careful and seek advice before making a contribution.
The amount you can contribute is partly linked to the amount of earned income you have in a tax year, usually from employment, self-employment, or profits from qualifying Furnished Holiday Lettings. However, if you do not have income from any of these sources, you are still entitled to make a contribution to a pension scheme of £2,880 and receive tax relief by the pension provider topping this up with £720 from HMRC to give a total amount invested of £3,600 gross.
This can be an effective means of building up pension savings for children and grandchildren, as contributions can be made by a third party on behalf of another individual.
Similar to the tax-free personal allowance for income tax, every individual is entitled to an Annual Exemption from Capital Gains Tax, with total gains below that limit (£11,700 for 2018/19) having no charge to Capital Gains Tax.
This is a use it or lose it relief, so if not used, it is lost and cannot be carried forward to the following year.
Perhaps consider whether you are holding assets at a gain that it would make sense to dispose of to utilise your annual exemption.
As with looking at transferring income producing assets between spouses to benefit from lower rates of income tax, the same can be true for Capital Gains Tax. If an asset is transferred between spouses prior to a sale, you could make use of a further annual exempt amount, and perhaps lower rates of Capital Gains Tax depending upon their level of income.
This can be easier to control than income, as a capital gain is treated as falling into the tax year in which the disposal takes place and there can be more control over when an asset is sold.
If you have already made disposals of assets in the current tax year, utilising your Annual Exempt amount for the year, you may want to delay further disposals until the next tax year (from 6 April 2019), when a new allowance, of £12,000, will be available.
Note that for sales of shares and investments, the date of sale for Capital Gains Tax purposes will be the trade or bargain date, rather than the settlement date, and for land and property sales, this is based on the contract date, rather than the date of completion, if different.
Another “annual exempt” amount available for every individual, is one in respect of Inheritance Tax.
Generally, when someone makes a gift to an individual, this is regarded as a Potentially Exempt Transfer for Inheritance Tax. This means that if the donor survives for seven years from the date of the gift, it will become exempt from Inheritance Tax. However, if they pass away before seven years has passed, the amount of the gift will still be included in their estate in calculating the Inheritance Tax due.
There are a number of potential exemptions available, but the standard annual exempt amount is £3,000. If total gifts within a tax year are less than this, the gifts will be immediately exempt and the seven year survivorship rule does not apply.
It is possible to carry forward an unused annual gift exemption for one year if it has not already been used. Therefore, if you did not make any gifts in the 2017/18 tax year, you could potentially make gifts of up to £6,000 before 5 April 2019 with immediate exemption from Inheritance Tax.
Do note that you are regarded as using your current year allowance first, before any unused brought forward allowance. Therefore, if you did not make any gifts in the 2017/18 tax year and you make gifts of £3,000 in the 2018/19 tax year, you will have used your 2018/19 allowance and there will be nothing to carry forward to the new tax year.
ISAs are a great means of tax efficient investment, as income arising from investments within an ISA is tax free, as is the capital growth, so no exposure to Income Tax or Capital Gains Tax.
The annual limits for ISA investment are currently £20,000 in total for an adult and £4,260 for Junior ISA for a child under the age of 18.
The above provides an overview of a number of different tools that can be used in ensuring that you maximise your tax efficiency and use of allowances available to you, but please do seek advice from our highly experienced teams before acting on any of the above, in order that we can ensure which are most suitable to your circumstances.