For the tax adviser working in the current environment, it often feels like the term “planning” is almost a dirty word. HMRC is making great efforts to clamp down on artificial tax avoidance schemes – and good luck with that, I say. The problem, of course, is that it seems HMRC sees tax avoidance as extending inexorably to include what a tax adviser could see as perfectly reasonable tax planning. One person’s planning is swiftly becoming another person’s avoidance.
As a result, a new term has entered the tax lexicon – “tax mitigation”. Taxpayers are still perfectly entitled to arrange their affairs within the letter and the spirit of the law to ensure that they pay no more than they are obliged to do.
Indeed, the law provides many opportunities to do this without the risk of becoming a social pariah and, as the end of the tax year approaches, thoughts should turn to how to best use these entirely legitimate opportunities. Many of these are “use it or lose it” reliefs, so this article is a call to arms to ensure that you can take advantage where it makes sense to do so.
None of these opportunities are going to be life changing, but cumulatively they add up to a reasonable sum – and the money is always better in your pocket than in the taxman’s!
Paul Brown - Head of Tax Compliance
Some of the simple opportunities include:
- Dividend allowance – the first £5,000 of dividends you receive this year are tax free… Well, not strictly true because, if they tip you into the next tax bracket, you pay a higher rate on the rest of your dividends. Nevertheless, it is still a nice saving to be had, so much so that the government is reducing the allowance next year to £2,000!
- Capital gains annual exemption – for this year you can realise capital gains of up to £11,300 per person without paying any tax. So, if you are contemplating selling assets, there is a good case to do so before 6 April. Even better, if you can sell the assets piecemeal, then do so partially this tax year and partially next – that becomes £23,000 with the allowance increasing to £11,700 in 2019.
- It gets better still – if you can transfer some of the assets (tax-free) to your spouse before sale, then they will also have access to a potential £23,000 tax-free – so a total of £46,000 without tax!
- Inheritance tax – each year you can give away £3,000 worth of gifts without any inheritance tax consequences – and if you did not use last year’s exemption you can take advantage of it this year as well. There are also other ways to get money out of your estate IHT-free with a little simple (and perfectly legitimate) planning – one little-known but potentially very useful relief is “gifts out of income”.
- Pensions – the pensions annual limit of tax-free contributions is £40,000 (although it reduces to £10k for certain higher-earning individuals). You can also utilise unused allowances for up to the last three years in certain circumstances – but once that three-year window has gone, that extra allowance disappears. With pensions freedoms and the ease of accessing your fund in due time, pensions remain a tax-efficient way to save for your retirement. However, be aware that there is a trap – go over your limit and all that tax benefit disappears, and you pay tax on excess contributions at your highest rate. All in all, pensions are a complicated area and may not necessarily be right for you – always consult your financial adviser before proceeding!
For those with an appetite for something a little more generous but also riskier (though still perfectly legitimate), the Venture Capital schemes may be attractive options. These schemes (known as Enterprise Investment Schemes (“EIS”), Seed EIS and Venture Capital Trusts) are designed to encourage investment in young businesses seeking external capital to grow.
They offer very attractive tax reliefs (50% of the amount invested for Seed EIS) up to fixed annual limits – and if you don’t use it this year, you lose it. You also get tax-free gains if you hold the shares for a period and then sell, and tax-loss relief if you lose your money. The flip side is the schemes are increasingly being refined to aim only at true risk capital – so while you may lose your money on the investment, there is a very significant tax cushion.
Year-end planning is not just about the various available tax reliefs. It may also be time to review your will. If there has been a birth or a death in the family; a marriage or a divorce; a move abroad; a significant change in the value of your estate; a new business or the disposal of a previous business; a retirement; or a relevant change in tax law, then it may be time to make changes to your estate planning.
Not all these opportunities are relevant or right for everyone. However, the key is to be aware of the opportunities and to be equipped to make a conscious decision about whether they make sense for you. As a tax adviser, there are few things I hate more than having to tell a client what they could have done once it is too late…
For further advice and guidance on your year-end tax planning, call 0161 477 2474 or email Inspired@hurst.co.uk