Tax year end planning for individuals

CCW Sue Daye

Sue Daye, Tax Partner in the Cheltenham office of national audit, tax and advisory firm, Crowe Clark Whitehill looks ahead at end of year tax planning…

Don’t miss out on annual allowances

Given the associated complexity around tax breaks, it can be easy to overlook the opportunities for efficient tax planning every year. There are a number of annual allowances that you must use by 5 April 2018 or you will lose them. Time is short, but here are just six areas you should be considering:

  • ISAs
  • tax efficient investments
  • pensions and charitable giving
  • savings and dividend allowances
  • Capital Gains Tax (CGT)
  • Inheritance Tax (IHT).

ISAs

There are several different types of ISAs and they can all grow completely tax-free, with no tax to pay when funds are withdrawn.

You can invest up to £20,000 in an ISA each year. For parents and grandparents looking to transfer funds efficiently to a child, £4,128 can be invested per child in a Junior ISA.

The Help-to-Buy ISA has been widely publicised and enables over 16s to save up to £200 per month. The government will add a 25% tax-free bonus when the money is used to buy a first home, capped at £3,000 on £12,000 of savings – a good way for parents and grandparents to help children on to the property ladder.

The Lifetime ISA (LISA) is only available to those under 40 when the account is opened. Contributions can be made up to the age of 50. As well as the above ISA tax benefits, a LISA receives a bonus of 25% of that year’s contributions but, to retain that bonus, the LISA must be used to purchase a first home or be withdrawn after the age of 60.

Tax efficient investments

Everyone has their own investment entitlement and income tax relief is available which can reduce your tax liability. Investments include shares that qualify under Venture Capital Trusts (VCTs), Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

Pensions and charitable giving

Personal income between £100,001 and £123,000 is taxed at an effective rate of up to 60%, owing to the loss of the personal allowance. Personal income over £150,000 is taxed at 45%.

There are ways of reducing income being taxed at these rates of tax by:

  • passing income yielding assets to a spouse with a lower income
  • deferring income to a later date
  • making pension contributions
  • making Gift Aid payments.

For those with relevant income over £150,000, the annual allowance for pension contributions has been reduced to £10,000 however, everyone should review their pension contributions to see if they could make additional contributions or make use of any brought forward unused annual allowance from the previous three tax years.

Savings and dividend allowances

The personal saving allowance permits £1,000 of tax-free interest for basic rate taxpayers, and £500 for higher rate taxpayers. This is a saving of up to £200 per person. There is no annual allowance for those paying tax at 45%.

Dividend income is another issue that needs urgent consideration before 6 April this year. Currently, the first £5,000 of dividend income is tax-free but this will be reduced to £2,000 from 6 April 2018.

These allowances are particularly significant for couples with jointly-held investments and for business owners choosing how to extract their profits.

Capital Gains Tax (CGT)

Most people have an annual CGT allowance of £11,300 for 2017-18 which means that capital gains on investments up to this figure are tax-free before 6 April 2018.

One way of using this allowance is to sell and buy back stocks and shares. This provides an opportunity to increase the base cost for future sales. The repurchase will need to be delayed for 30 days, or made by your spouse, civil partner or ISA to benefit.

Assets standing at a loss can also be sold to reduce capital gains in the same tax year or carried forward and set against future capital gains.

Inheritance Tax (IHT)

The fact that you can make an annual gift of £3,000 IHT-free means that parents and grandparents can make tax efficient gifts.

You can also make as many small gifts of £250 per person as you like each year, so this provides the opportunity of gifting £250 to each child or grandchild, each and every tax year IHT-free. Something to think about with birthdays and special occasions in mind.

Regular gifts out of surplus income can also be made IHT-free, but great care should be taken to ensure they are regular and specialist advice should be sought to ensure you remain compliant.