Even though we have only just passed the self assessment deadline for the 2013/14 tax year, we are almost at the end of the 2014/15 tax year. Tax planning should always be an ongoing process, but now is the ideal time to consider whether you have really made the most of all the tax planning opportunities for the 2014/15 tax year that could be classed as “sensible housekeeping” rather than aggressive tax planning.
There are many acceptable ways in which the Government has enabled you to reduce your tax liability for the year, so we wanted to give you a chance to think about a few of these as an aide memoire, in case they could be applicable to you. There may well be other planning opportunities that could apply to your circumstances, and we recommend that you contact us to discuss your particular situation.
With this year’s general election almost upon us, the press has been reporting on a number potential tax changes, each of which is designed to appeal to different sections of the voting population. Although it’s always possible that any planning you undertake could be retrospectively changed following the election, this is no reason not to consider your options!
Level of income planning
In addition to income being taxed to the extent that it falls within the basic, higher and additional rate bands at 20%, 40% and 45% respectively, you should also be aware of two critical income thresholds where the marginal rates of tax can be very high. Basic tax planning should involve consideration being given to keep taxable income within the bands, and minimising your exposure to the high marginal rates to the extent you are able and willing to do so. For many individuals their levels of income may remain fairly constant from year to year. However where income fluctuates, it makes sense to be aware of these thresholds and, if possible, manage these in order to avoid accidentally falling into the very high marginal rates of tax.
Critical income thresholds to watch out for:
1. Where your taxable income falls between £100,000 and £120,000. For 2014/15 your personal allowance is reduced by £1 for every £2 of income over £100,000. So non-dividend income falling into this band will bear tax at a marginal rate of 60% and dividend income at 37.5%!
2. If you or your partner receives child benefit, you could be subject to the High Income Child Benefit Charge (HICBC) claw back, where income is between £50,000 and £60,000. Depending on the number of children involved, this can lead to very high marginal rates of tax.
Timing of income and gains
Another element that you need to think about is what action you can take to manage your tax exposure at the higher rates, by looking at the timing of recognition of income and gains. The movement of income out of these bands and into a different tax year could represent substantial tax saving. It will be sensible to estimate what your taxable income is likely to look like for the following year (2015/16), in order to explore your planning opportunities. For example, if it looks like you could be in the high marginal rates in that year, then you will be in a position to see whether it would be appropriate or possible to advance income into 2014/15 or to defer expenditure into 2015/16.
An individual with their own limited company should think about whether the timing of the payment or entitlement to the payment of salary or dividends can be managed so that they fall into the most advantageous tax year.
Managing the timing of taxable income can also be achieved by bringing forward or delaying the point at which deductible expenditure is incurred. Examples of this type of payment would be:
- Payment of contributions to a registered pension scheme, which save tax at your marginal rates in the tax year in which they are made. You would need to make these on or before 5 April 2015 if these are to be effective for the 2014/15 tax year. There are complex rules on how much you can pay before incurring the annual allowance charge, so careful analysis of your position is advised, if this is to be optimised.
- Payments under Gift Aid can be made as donations to charity. These can save tax at both the higher and additional rates. For example, if you are going to make payments by say direct debit on a monthly basis throughout the year, it may be worth considering whether to make these before the end of 2014/15 instead. It is also possible to treat payments made in the following tax year, but before the tax return is filed, as being made in the earlier tax year, thus achieving a reduction in taxable income in the earlier year.
- If you are self-employed or in partnership it may be possible to accelerate planned capital expenditure which qualifies for the 100% annual investment allowance (AIA). This AIA has been increased to £500,000 for qualifying asset expenditure on or after 5 April 2014. However, this is set to reduce to £25,000 for expenditure incurred after 31 December 2015. For periods of accounts straddling either of these dates, there are complex apportionment rules determining how much allowance you receive. If you have substantial capital expenditure planned in 2015 and beyond, it could be worth looking at making as full a use of the allowance as possible.
The ability to use any trading losses can be useful in managing the level of taxable income. A trading loss for 2014/15 in an established business can be used against the taxable income for the prior year or the 2014/15 year, or can be carried forward to offset against profits from the same trade in a future year.
Losses can also be set off against other income in the tax year, (Sideways tax relief) but this is now limited to the greater of £50,000 or 25% of an individual’s total income. Planning can ensure that losses are claimed in the most tax effective way.
Use your allowances
As far as capital gains tax is concerned, similar consideration should be given to the timing of the realisation of any gain or loss, although clearly tax considerations are only part of the decision on whether to sell an investment. Each individual has a capital gains tax free annual exemption of £11,000 for 2014/15. Thought should be given as to whether it would be appropriate or possible, by crystallising gains on investments, to ensure that this tax free allowance is not wasted. If your gains are already in excess of the exemption then losses could be crystallised instead. This is particularly pertinent if the level of your other income means that any gains in excess of the exemption would be taxed at 28% instead of the lower rate of 18%. However, where you would wish to repurchase the same shares within 30 days, the “bed & breakfasting” rules would prevent this planning from working, although it is possible for a spouse or an ISA to repurchase the shares within that period, without the anti-avoidance rules applying. You could also think about deferring any sales towards the year end that would produce substantial gains until after 5 April 2015. In addition to potentially falling within the 2015/16 annual exemption, the payment of any tax that did become due would be deferred by another year.
If a gain is likely to exceed one allowance, then in addition to splitting this over two or more tax years, thought could be given to the potential of accessing a second capital gains tax annual exemption, where possible. Spouses/civil partners may transfer shares to each other on a no gain no loss basis and then each use their own annual exemption on subsequent sale. This may also assist in using up any unused basic rate band of one of the parties. Where it is intended to use entrepreneur’s relief to further reduce the capital gain realised in this situation, care needs to be taken to ensure that the transferee spouse fulfils the qualifying conditions themselves for the twelve month period, as they cannot inherit the original spouse’s holding period.
Also consider whether one of the couple might have capital losses to use up from earlier years, that could further increase the potential tax saving.
Another “use it or lose it” allowance is the ISA/NISA limit allowing you to invest tax free up to the annual limit. From 1 July 2014 this increased to £15,000, and is more flexible than it was previously allowing investment in stocks & shares, cash or a mixture of the two.
Tax efficient investments
The Government have introduced tax relief under the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment scheme (SEIS) and for Venture Capital Trusts (VCTs) aimed at stimulating investment in what have traditionally been perceived as higher risk companies. These reliefs offer income tax relief and capital gains tax deferral and exemption opportunities, subject to the maximum investment limits. The rules for qualification for these reliefs are complex and there are many traps for the unwary or ill advised! You should always take advice on the application of the conditions for the reliefs and its withdrawal.
- Income tax relief at 30% for EIS and VCTs, and at 50% for SEIS is available, as well as generous capital gains tax reliefs.
- EIS and SEIS shares are free of CGT on disposal if held for three years and can be used to defer capital gains realised in the last three years.
- Reinvestment of 2014/15 gains on any disposed asset into SEIS shares can benefit from a 50% CGT exemption on the original disposal.
- Gains made by investors in VCT shares are not subject to capital gains tax, subject to the annual subscription limits.
Look to the future
The above ideas are concentrated on immediate actions that can be taken before the end of the tax year on 5 April 2015. However, you should always be looking to plan your tax affairs over the long term. Beyond the scope of this particular article, we advise that you carefully consider taking steps to reduce the potential liability to Inheritance tax (IHT). Without careful planning, this can significantly reduce the value of assets that you have to pass to the next generation. It is never too early to make an IHT plan to achieve a 40% tax saving. Remember that it is almost impossible to undertake effective IHT planning shortly before a death.
For owner managed trading businesses, the Entrepreneurs relief position should always be kept under review. This very valuable relief can reduce the capital gains tax on qualifying business disposals from 18% or 28% to 10%, subject to a lifetime allowance of £10 million. Because many of the qualifying conditions must be met for one year prior to sale, proper planning and careful analysis of changes that need to be made to the business can ensure that as many shareholders qualify as possible, and that the relief is not accidentally lost!
How we can help
As tax advisers, our objective is to work closely with you to ensure you pay the right amount of tax required by law. We will help you to understand the tax implications of your actions, in order that you can plan ahead and conduct your affairs in a tax efficient way. If you would like to discuss your tax planning with us please contact Martin Jones on 0207 2928850 or on firstname.lastname@example.org
Kingly Brookes LLP takes every care when preparing this overview material. However, no responsibility can be accepted for any losses arising to any person acting or refraining from acting as a result of the material contained in this article. We would always recommend that you should contact us to discuss your circumstances.