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Year end tax planning opportunities for individuals

Tom Elliott, Partner, Head of London Private Clients
17/12/2019
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As we approach the later part of the tax year, it is the perfect time to reflect on tax planning opportunities that are available to you and your family. We have outlined points to consider including those that are 5 April sensitive and a number of annual allowances available.

Following the Conservative Party’s victory in the recent General Election, it seems that private clients appear to be unaffected by proposed tax changes at the moment, aside from the promised increase to the higher rate threshold included in the party’s manifesto.

Individual Savings Accounts (ISAs)

There are a number of different types of ISAs and they all grow income and capital gains tax-free and are not taxed when withdrawn.

  • ISA: An annual allowance of £20,000 can be invested by UK residents over 18.
  • Junior ISA: An annual allowance of £4,368 can be invested per child. This provides an opportunity for parents or grandparents to transfer funds to a child.
  • Help-to-Buy ISA: Over 16’s can save up to £200 a month. The government will add a 25% tax-free bonus, when the money is used to buy a first home, capped at £3,000. This provides a tax-efficient opportunity for parents or grandparents to assist children getting on the property ladder.
  • Lifetime ISA (LISA): Up to £4,000 of the ISA limit can be contributed. This is only available for those aged between 18 and 40 at the time of opening the account. Contributions can be made up until the age of 50. In addition to the usual ISA tax benefits, a LISA will receive a bonus of 25% of that year’s contributions. In order to retain the bonus, the LISA must be used to purchase either a first home or be withdrawn after the age of 60.

Income tax planning: pensions and charitable giving

Personal income between £100,001 and £125,000 is taxed at an effective rate of 60%; this is due to the loss of the personal allowance. Personal income over £150,000 is taxed at 45%.

Individuals may be able to reduce the income being taxed at these high rates of tax by taking advantage of the following:

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

Where personal income exceeds £125,000 after deductions for pension contributions and Gift Aid, individuals that manage their own companies may wish to consider accelerating income into the current tax year – up to the £150,000 additional rate threshold – to maximise use of the higher rate band.

Gift Aid payments

The key about making Gift Aid payments is all about the box you tick to say that you are UK resident and a taxpayer. The Gift Aid payment is then disclosed on your tax return and you will receive a further 20% or 25% of the grossed up donation as a reduction in your tax liability.

Ideally, the person in the family with the highest marginal tax rate should be making the Gift Aid payments.

How it works, you make a Gift Aid donation of £80 and tick the box. The charity receives your £80 and claims £20 basic rate tax from the Government. The charity therefore receives £100 in total. The Gift Aid payment is disclosed on your tax return and if your marginal rate is 40%/45% then the reduction in your tax liability will be £20/£25. For a 45% taxpayer the donation has only cost £55.

Pension contributions

All UK residents are able to contribute up to £3,600 gross, £2,880 net a year regardless of income. If aged over 75 then no tax relief is available.

However, the annual pension contribution capacity in 2019-20 is the lower of your relevant earnings and the annual allowance of £40,000 gross, equating to a £32,000 net payment.

If your adjusted income (generally, your total taxable income plus employer pension contributions) is over £150,000, then the annual allowance is tapered away by £1 for every £2 of income. There is a minimum level of £10,000 gross, £8,000 net for those with adjusted income in excess of £210,000 (read our alert Pension contributions: act now to maximise tax efficiency) .

Tax efficient investments

Individuals have their own investment entitlement and income tax relief is available which will reduce your tax liability.

  • Venture Capital Trusts (VCTs): Investments up to an annual maximum of £200,000 qualify for income tax relief at 30%. Dividends received are tax-free. There is no Capital Gains Tax (CGT) payable on any gain made when sold.
  • Enterprise Investment Scheme (EIS): Investments in qualifying companies up to an annual maximum of £1 million attract income tax relief at 30%. This limit is increased to £2 million where investments over £1 million are invested in knowledge-intensive companies. Relief from CGT is available where an amount up to the level of the capital gain is reinvested in a company qualifying for EIS. The original capital gain is deferred until the EIS shares are sold. At which point the capital gain comes back into charge and is taxed at the prevailing rate.
  • Seed Enterprise Investment Scheme (SEIS)An individual can invest up to £100,000 per tax year in start-up companies that qualify for the SEIS. Income tax relief is at 50% of the investment. It is also possible to reduce capital gains in the year by up to 50% of the SEIS investment.

If you have capacity in the 2018-19 tax year the investments in both EIS and SEIS can be carried back and income tax relief obtained in the earlier year.

If the EIS or SEIS investment is held for more than three years any capital gains generated are exempt from tax.

Savings and dividend allowances

There is a personal savings allowance of £1,000 of tax-free interest for basic rate taxpayers, and £500 for higher rate taxpayers. This is a saving of £200 per person.

There is no allowance for those paying tax at 45%.

The first £2,000 of dividend income is tax-free. These allowances encourage families to structure their savings to utilise these allowances where possible.

Trading and property allowances

Two separate £1,000 tax-free allowances are available; one for trading and miscellaneous income, and another for income from property. These allowances are designed to exempt modest amounts of income for example from sales on eBay, Amazon or Airbnb.

Where an individual rents out part of their only or main home, up to £7,500 of income from the letting will be tax-free due to availability of rent-a-room relief.

Marriage allowance

Where one spouse is a basic rate taxpayer, and the other has income below the personal allowance, the latter can transfer 10% of their personal allowance to their spouse resulting in tax relief of up to £250 in the current tax year.

Employment

Tax relief can be claimed on certain expenditure incurred in connection with your employment. This includes professional subscriptions and business miles travelled in your own vehicle.

Employees should also review their tax codes to ensure that the correct allowances and deductions are included. If the tax codes in the current year are incorrect then an underpayment or over-payment may arise and be due following the end of the tax year, 5 April 2019.

Capital Gains

The majority of individuals have an annual CGT allowance of £12,000. Therefore capital gains on investments up to this amount are tax-free before the 6 April 2020.

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

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

For individuals that hold assets qualifying for Entrepreneurs’ Relief, disposals made after 5 April 2019 will have to meet the qualifying conditions during the two years prior to disposal. In the current tax year, the conditions only need to be met for one year prior to the date of disposal.

Inheritance Tax (IHT)

An individual can make an annual gift of £3,000 IHT-free. This provides parents (and grandparents) with an opportunity to make tax-efficient gifts.

Individuals can also make as many small gifts of £250 a person as they like per tax year. This provides the opportunity of gifting £250 to each child or grandchild each and every tax year IHT-free.

Regular gifts from disposable income may also be made IHT-free. Great care however needs to be taken to ensure that the gifts are habitual in nature and are out of income which is in excess of regular expenditure. This is a complex area and advice should be sought.

Additional points to consider

  • Do you have sufficient life assurance cover?
  • Do you have critical illness cover?
  • Do you have income protection?
  • Is your estate efficient for IHT purposes? We can work with you to minimise your potential IHT exposure.
  • Is your Will up to date? We can help you to ensure your Will is IHT efficient.
  • Do you have a lasting power of attorney (LPA) in place?
  • Do you have a “death box” with details of where your financial information is held?
  • How will your family deal with your internet and social media accounts in the event of illness or death?

Taking advantage of year-end tax planning should only be part of your overall tax planning strategy. Tax planning is all about putting into place a strategy which provides the right structure and security of your financial affairs. Your strategy should evolve and develop with time and enables you to plan for the future.

For more information on how you can make the most of you tax planning opportunities please speak to your usual Crowe contact. 

Contact us

Our national private clients team provides specialist tax advice to some of the most successful individuals and families in the UK. We understand that absolute discretion is essential and take pride in building long-term relationships with our clients. Get in touch with us today.
Tom Elliott
Tom Elliott
Partner, Head of London Private Clients
London