As the end of another tax year approaches, now is a good time to consider your financial position and check whether you have taken full advantage of the tax reliefs and exemptions that are available. This note is intended to provide a brief guide to the opportunities that we believe may be worth considering. There are many tax-saving measures available and we detail below a number of steps that can be taken to improve your tax position, without significant effort.
Of course, the impact of taxation is only one element in establishing your financial position — you should also be considering at this time such issues as:
- your savings and investments;
- the extent of your wealth and how it will be passed to the next generation.
These are issues on which Shepherd and Wedderburn LLP and Shepherd and Wedderburn Financial can advise you. Please speak to your usual contact within the firm if you require any assistance in these areas.
Income Tax Planning
Generally, each individual can receive income of up to £9,440 in 2013/14 without incurring liability to income tax. However, for individuals with income in excess of £100,000 allowances will be restricted by £1 for every £2 of income in excess of this amount. Therefore, an individual with income in excess of £118,880 will not receive any allowances. Certain non-UK domiciled individuals may also have their allowances restricted.
From 6 April 2014 the basic personal allowance will increase to £10,000 however higher rate taxpayers will not benefit from this as the basic rate band is to be reduced.
Rates of Tax
For 2013/14 the higher rate threshold is £32,010. On 6 April 2014 this will fall to £31,865. Income above these figures and below £150,000 will be taxed at the higher rate of 40%. Income in excess of £150,000 is now taxed at 45%. There are ways of mitigating future liabilities.
For married couples, where only one spouse is a higher rate taxpayer, consider ways of transferring income to the lower earning/non-earning spouse in order to reduce the overall tax bill. Income producing assets may be transferred to children to obtain the benefit of their personal allowances [although this will not be effective where children are under 18 (unless they are married) and the funds are provided by their parents]. Grandparents can make effective use of this type of planning when considering their estates.
Cash donations to charities under gift aid are deemed to be paid net of basic rate tax. Where appropriate, higher rate tax relief for the donor is given by extending the basic rate band. It is also possible to gift assets such as shareholdings and property. Unlike cash donations, relief equivalent to market value is given by way of a deduction from total income in the year of gift, similar to additional allowances. This is especially useful where small shareholdings are concerned. It is also possible for higher rate tax relief purposes to elect for cash donations to be treated as being made in the preceding tax year giving the potential for repayments of tax.
Capital Gains Tax (CGT) Planning
First and foremost, consider whether you have used your CGT annual exemption for 2013/14 in full. Each individual can realise net capital gains (gains less losses) of up to £10,900 in the year without incurring a CGT liability. If the exemption is not used this year, it cannot be carried forward.
Whilst it is no longer possible to "bed and breakfast", unless the repurchase is over 30 days later, there are alternatives such as "bed and spousing" and "bed and ISAing".
Tax Rate for Capital Gains
Capital gains in excess of the annual exemption are now taxed at a flat rate of 18% for basic rate taxpayers or 28% for higher rate. Whilst it remains tax efficient to incur, where possible, a capital gains tax liability rather than an income tax liability, there is a planning opportunity for spouses where one is liable at basic rate and the other at higher rate.
It may be that assets will be sold at a loss. If your gains are already above the annual exemption this year, then you might consider if there are investments on which a tax loss will arise which could be sold to minimise or avoid having to pay CGT. It may not be necessary to actually sell the investments — if their value has fallen to such an extent that they are considered to be of "negligible value", a capital loss can be claimed without an actual disposal being required. If you have made capital losses this year that are greater than your capital gains, the excess can be carried forward to future years.
Inheritance Tax (INT) planning
In previous flyers we have highlighted the main issues in IHT planning. These include:
- Making full use of the IHT annual gifts exemption.
- Gifts out of income
- A chargeable lifetime gift or an estate on death will result in an 1HT liability only to the extent that it exceeds £325,000, the IHT "nil rate band". The nil rate band remains frozen until at least 2015.
- We would be pleased to provide more detailed advice on request.
Savings and Investments
Individual Savings Accounts (ISAs)
Have you taken out an ISA in 2013/14? You can invest up to £11,520 in an ISA in this tax year. Capital gains and most income on investments within an ISA are tax-free. The limit for the cash ISA is £5,760. The limits increase to £11,880 and £5,940 with effect from 5 April 2014.
You can transfer your current ISA to a new ISA provider. A Cash ISA can also be transferred into a Stocks and Shares ISA in addition to the annual allowances.
Most individuals may make pension contributions of up to £3,600 gross per annum and obtain tax relief on them, even if they are not taxpayers. As well as improving your own financial position, this could be used to establish pension plans for children, or grandchildren, or for a non-earning spouse.
The annual and lifetime allowances are significantly reduced for this and future tax years. Currently the annual allowance is £50,000. Similarly the lifetime allowance has fallen to E1.5M. Where pension funds are nearing the existing limit it may be possible to apply for fixed protection. Any claim must be made before 6 April 2014. Payments in excess of the annual allowance may be subject to an additional tax charge. However the charge may be avoided, as it is possible to take into account any unused allowance in the preceding 3 tax years. The relief assumes that the individual was a member of a registered scheme and that the annual allowance is £50,000 for those 3 years.
There is to be no cap on the rate of tax relief for pension premiums, 45% relief is possible in appropriate circumstances. Pensions planning is a specialist area and our advisers in SVVF are on hand to assist with any queries.
The above comments are for general guidance only and are based on the tax legislation as at 6 March 2014. Changes in tax legislation may be announced in the 2014 Budget to be delivered on 19 March 2014 that may become effective before the end of the 2013/14 tax year. Detailed advice should be obtained before taking action, or refraining from taking action, in connection with any of the tax planning opportunities described above. Shepherd and Wedderburn LLP is in respect of legal advice, regulated by The Law Society of Scotland and the Solicitors Regulation Authority. Shepherd and Wedderburn Financial Limited is authorised and regulated by the Financial Conduct Authority.