The end of the financial year is approaching and it is a good time to plan your finances and ensure you make use of your investment and/or tax allowances before 6 April 2020.
Stuart Elder, Financial Planning Director at Crowe Financial Planning UK, gives some of the most commonly used and effective strategies you could consider:
Individual Savings Account (ISA)
- You can invest up to £20,000 in individual ISAs in the 2019/2020 tax year.
- Capital growth and dividends/interest are free from Capital Gains Tax and Income Tax.
- There are different types of ISA available, each with different rules and contribution levels.
- You can split your annual allowance between the different types of ISA, subject to the appropriate rules and eligibility criteria.
- You can invest in a Junior ISA (or Child Trust Fund) for children under the age of 18.
- You cannot carry forward any unused allowance to the following tax year so if you don’t use it, it will be lost forever.
Capital Gains Tax (CGT) Exemption
- You only have to pay CGT on your overall gains above your tax free exemption of £12,000 (for individuals) for the 2019/2020 tax year.
- Couples who are married or in a civil partnership, are able to transfer assets between them without incurring any CGT (subject to certain criteria).
- Careful planning – which may include disposal of assets or investments – could help restructure an investment portfolio to improve tax efficiency over the longer term.
- You cannot carry forward any unused CGT annual exemption to the following tax year so if you don’t use it, it will be lost forever.
Pension Annual Allowance
- The annual allowance is a limit on the total amount that can be contributed to your pension from all sources (including your employer) each year tax efficiently. The standard annual allowance is £40,000 but for very high earners it can vary between £10,000 and £40,000 (2019/2020 tax year). If you have flexibly accessed a money purchase pension your annual allowance for money purchase funding reduces to £4,000. If your pension funding exceeds your annual allowance, you will pay a tax charge on the excess.
- Pension contributions may be used to reduce your income tax liability and in some cases reclaim the personal allowance or child benefit.
- Calculating your available pension annual allowance can be complicated, especially if you are a member of an active final salary scheme.
- It is possible to carry forward any unused allowance from the past three years if eligible. However, the calculations can be complex and advice should be sought.
- In addition to the annual allowance, tax efficient personal contributions are limited to 100% of your earnings (or £3,600 if more).
Inheritance Tax (IHT) Planning
- There are various IHT exemptions that you can use:
- small gifts
- annual exemption
- gifts in consideration of marriage
- expenditure out of income.
- HMRC allows you to make a number of small gifts each year without creating an IHT liability – each person has their own allowances, so the amount can be doubled if each spouse or partner uses their allowances.
- Gifts that are not exempt may be classed as Potentially Exempt Transfers (PET) and may become exempt if you survive for at least 7 years after the gift has been made.
- Some gifts into certain types of Trust may be classed as Chargeable Lifetime Transfers (CLTs) where the tax rules can be quite complicated. In these instances advice should always be sought.
- IHT planning can be complex and is dependent on individual circumstances.
Before making any commitment to undertake a particular transaction, it is highly advisable to speak with your financial advisor or contact us at Crowe Financial Planning.
For more information or to discuss please contact Stuart Elder, firstname.lastname@example.org
Crowe U.K LLP
49-51 Blagrave Street
Reading, RG1 1PL, UK
Crowe Financial Planning UK Limited is authorised and regulated by the Financial Conduct Authority (‘FCA’) to provide independent financial advice.
The information set out above is for information purposes only and does not constitute advice to undertake a particular transaction. Appropriate professional advice should be taken on specific issues before any course of action is pursued. Any advice provided by a Crowe Consultant will follow only after consideration of all aspects of our internal advice guidance.
Past performance is not a guide to future performance, nor a reliable indicator of future results or performance. The value of investments, and the income or capital entitlement which may derive from them, if any, may go down as well as up and is not guaranteed; therefore investors may not get back the amount originally invested.
The Financial Conduct Authority does not regulate estate planning or tax advice.