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Year end personal tax planner

As the end of the tax year approaches, it is now the time in which you should consider whether any opportunities remain to mitigate your 2018/19 tax liabilities.

Our letter sets out the potential opportunities still available to you, and then considers the changes that have already happened that could affect your 2018/19 tax position. Finally, we consider any future changes that were previously announced in the 2018 Autumn Budget.

These notes are written in general terms in order to be of the widest possible use, and it is important therefore that specific advice is sought in relation to your own individual circumstances. Rates and allowances quoted do not refer to the different Scottish tax rates, and partial income tax raising powers are due to arrive in Wales in April 2019.

Please approach one of the tax team at Butler & Co should you require any further information. For investment advice, we always recommend that your particular circumstances are examined by an Independent Financial Adviser. We can’t give investment advice but where appropriate we can recommend a range of IFAs to match your needs and we would be happy to make an introduction should you require assistance of this nature.

Saving tax for the year ending 5 April 2019

Individual Savings Accounts (“ISAs”)

Utilise your 2018/19 allowance - individuals can invest a maximum of £20,000, the same as for 2017/18. Income and gains within ISAs are free of UK income tax and CGT.

This £20,000 limit remains for 2019/20, although the limit for Junior ISAs and Child Trust Funds will increase to £4,368 from £4,260.

Pension contributions

Pension contributions made by individuals continue to attract tax relief subject to the following limits:-

  1. £3,600 for individuals with no earnings or earnings up to £3,600 per annum;
  2. The individual’s relevant earnings up to a maximum of £40,000 per annum.

The overall lifetime allowance for an individual’s pension fund has increased to £1,030,000, and this will increase further to £1,055,000 for 2019/20.

Tax relief is available at an individual’s marginal rate of tax, and there is the availability to carry forward unused allowances for three earlier years (subject to limits and conditions). There are significant implications for high earners due to the legislation currently in place, and in the event that you have not already done so, we recommend that you review your 2018/19 position at the earliest opportunity, and certainly before 5 April 2019.

Pension planning can be particularly effective where total income is expected to exceed £100,000, leading to a loss of all or part of the 2018/19 personal allowance. Effective planning can reduce income and preserve the personal allowance, and where you are aged 55 or over, it may be worth considering taking a tax free lump sum from your pension scheme at an early stage.

With the reduction in tax deductible pension contributions for high earners, it is important to consider the options available to you prior to 6 April 2019. Advice should be sought from your Independent Financial Adviser as a matter of urgency. If you do not have an independent financial adviser we would be happy to recommend one to you.

Charitable giving

Higher rate tax relief can be obtained on Gift Aid donations and charitable Deeds of Covenant. Where total income is expected to exceed £100,000, charitable giving can be used to preserve the personal allowance.

Sharing income

The transfer of income producing assets from one family member to another can result in family income being spread between those members, so that as few as possible face a reduction or withdrawal of their personal allowance. In addition to preserving personal allowances, income producing assets can be transferred in order to maximise the tax rate bands.

For example, if one spouse faces a 40% or 45% marginal tax rate and the other is a basic rate taxpayer, there is potential for a 20% or 25% tax saving to be made once the asset has been transferred.

Care needs to be taken in passing business assets between family members, and capital gains tax and inheritance tax also need to be considered. It may be appropriate to combine this exercise with additional Inheritance Tax planning.

Salaries and bonuses

Consideration should be given to utilising unused personal allowances by means of taking a salary, bonus or dividend from your limited company. Salaries and bonuses will need to be paid before 5 April 2019 in order to be effective for the purposes of claiming Corporation Tax relief.

Please also note that for payroll purposes, the Real Time Information (RTI) regulations have removed the flexibility that could sometimes be employed when dealing with salary issues. It is therefore now essential that any wages/bonuses that have been accrued for or are due to be paid, are processed through the payroll and recognised by 5 April 2019 at the latest.

Enterprise Investment Scheme (“EIS”)

Income tax relief at 30% is available where an investor subscribes for shares in a company, and both the investor and the company meet several qualifying conditions. The maximum investment qualifying for relief is £1 million, with an additional £1 million annual limit as long as at least £1 million is invested in “knowledge intensive” companies. Capital gains on the realisation of the EIS investment are tax free provided that the shares are held for a minimum of three years.

It is also possible to defer capital gains tax by making an investment in EIS shares. The investment must be made within a period of one year immediately preceding or three years immediately following the date on which the capital gain is realised.

EIS shares held for more than two years usually qualify for Business Property Relief (BPR), for Inheritance Tax purposes. Advice is critical, however, as there are numerous conditions that need to be satisfied in order to secure the relief.

Seed Enterprise Investment Scheme (“SEIS”)

This is a tax advantaged venture capital scheme, similar to EIS in many of its scheme rules. It focuses on smaller early stage companies carrying on or preparing for a new business in a qualifying trade.

Income tax relief at 50% is available to an investor on the amount he subscribes for shares, subject to an overall investment limit of £100,000. Capital gains tax reliefs operate on broadly the same principles as those for EIS. Shares must be held for a minimum of three years to avoid the withdrawal of reliefs obtained.

Venture Capital Trusts (“VCTs”)

A VCT is a close ended quoted investment vehicle which looks to invest in small unquoted trading companies. 30% income tax relief can be claimed up to a maximum investment of £200,000 when you subscribe for shares in a VCT.

Dividends and capital gains from the VCT are tax free provided that the VCT is held for five years.

Capital gains tax

Consider the disposal of assets in order to make use of the annual capital gains tax exemption of £11,700 (2019/20 £12,000). This cannot be carried forward and will be wasted where it is not used by 5 April 2019. If you have already realised gains and have some investments standing at a loss, consider selling the ones at a loss to reduce your tax bill. Spouses should also consider transferring ownership of assets in order to make use of the annual exemption, although Intra-spouse transfers carry no capital gains tax implications.

Gifts

Lifetime gifts to any one person during 2018/19 are exempt from Inheritance Tax where the total gifts to that person do not exceed £250.

The first £3,000 of lifetime transfers made during 2018/19 are exempt from Inheritance Tax, together with a further £3,000 where the exempt amount from 2017/18 remains unused.

Further gifts may also be made in consideration of marriage or civil partnership - £5,000 by a parent, £2,500 by a grandparent, £2,500 by one party to the marriage/civil partnership to the other and £1,000 in any other case.

In addition, unlimited regular gifts by an individual out of income can be made free of inheritance tax, provided that the income is surplus to meeting normal living expenses. In this scenario, gifts are tax free (even in the event of death within seven years). It is important to record gifts of this nature as they are made, in the event that you are called upon to demonstrate that they qualify for this relief.

Business Tax

The Annual Investment Allowance (AIA) 100% tax relief on qualifying capital expenditure has been increased from £200,000 to £1m a year for the next 2 years – this came into effect from 1st January 2019.

A new 2% flat rate per annum capital allowance on the construction of new non-residential buildings. The costs that can be claimed include that for the alteration of the land – including demolition, but not the cost of the land or obtaining planning permission.

Planning ahead – Incorporation

Consideration can be given to restructuring your business as a corporate vehicle, in order that personal tax liabilities can be limited to the extent that income is withdrawn by way of salary or dividend. Whilst business profits will be subject to Corporation Tax, planning of this nature gives scope for personal allowances to be maximised and higher rate tax exposure to be mitigated.

There are other tax consequences and commercial reasons that need to be considered before the decision to operate as a limited company can be taken, but with potentially significant tax savings on offer, this is an area of planning that can prove to be extremely beneficial.

Changes for the year ending 5 April 2019

Personal Allowance

The tax free personal allowance increased from £11,500 last year to £11,850 for 2018/19. A further increase to £12,500 will come in from April 2019.

Personal Savings Allowance

A starting rate for savings band of £5,000 at 0% may be available unless taxable non-savings income exceeds the starting rate band, as follows:

  • If your total taxable income is less that £17,850 in a given year, you will not pay tax on your savings income.
  • If your total taxable income is between £17,851 and £46,350, the first £1,000 savings income is tax-free.
  • If your total taxable income is between £46,351 and £150,000, the first £500 of savings income is tax-free.
  • The allowance is not available for those with total taxable income exceeding £150,000

Marriage Allowance

The Marriage Allowance allows for up to 10% of your personal allowance (£1,185 in 2018/19, increasing to £1,250 in 2019/20) to be transferred to a spouse or civil partner if your income is less than £11,850 (£12,500 in 2019/20). The recipient’s tax liability is reduced by 20% of the amount transferred, giving a potential saving of £237 for 2018/19 and £250 for 2019/20.

This is available to couples, provided that the higher earner is not a higher or additional rate taxpayer. However, married couples who are eligible to claim the Married Couples Allowance (MCA) will not be able to make a claim. Claims are also allowed where a partner has died before the claim was made and claims will be able to be backdated by up to four years.

Higher Rate threshold

The amount of income you can earn before paying the 40% higher rate of tax increases from £45,000 in 2017/18 to £46,350 in 2018/19. It is also then increased further to £50,000 in the 2019/20 tax year.

Tax on dividends

The first £2,000 of dividends are free of tax due to the Dividend Allowance (reduced from £5,000 in 2017/18).

The rates thereafter are:

  • 5% for basic rate taxpayers
  • 5% for higher rate taxpayers
  • 1% for additional rate taxpayers

Despite the fall in the Dividend Allowance, Limited companies are still a very tax efficient route of managing your business, given that you are still only liable to 7.5% tax on your dividends (should you choose to remunerate yourself this way) rather than you being liable to 20% tax and 9% Class 4 National Insurance on profits through self-employment.

Mortgage Interest on Residential Lets

This is the second year of the phased-in restriction of tax relief for mortgage interest, as follows:

2018/19: 50% of the mortgage interest can be claimed against rent, with 20% tax relief on the remaining 50% of the interest.

2019/20: 25% of the mortgage interest can be claimed against rent, with 20% tax relief on the remaining 75% of the interest.

2020/21: 0% of the mortgage interest can be claimed against rent, with 20% tax relief on full amount of the interest.

For some basic rate tax payers with rental income, this will not have much (if any) impact on the amount of tax that they pay on their rental profits. However, this is not the case for everyone and we can always review the impact of this for any client who would like more details of how the restriction will affect them.

Capital gains tax

There have been no movements in the Capital Gains Tax rates. The sale of non-residential assets will still be charged at 10% for basic rate tax payers and 20% for higher rate tax payers.

Capital Gains Tax on the sale of residential property still remains at 18% for basic rate tax payers and 28% for higher rate tax payers. 

The tax rate applying when Entrepreneurs’ relief (ER) is available is still 10%. However the 2018 Autumn Budget brought in several changes to qualifying conditions for ER and from 6 April 2019 the minimum period that qualifying assets must be held is extended from one year to two years.

Similarly, the tax rate applying when Investors’ relief is available is 10% and as the shares had to be held for at least three years following 6 April 2016, Investors’ relief will therefore be available for the first time on qualifying disposals from 6 April 2019.

Please refer to us for further advice if you are considering disposing of an asset before 5 April 2019.

Stamp Duty Land Tax: first-time buyers

First-time buyers paying £300,000 or less will continue to pay no SDLT and on properties costing between £300,000 and £500,000, SDLT will be charged at 5% on the excess over £300,000. SDLT on properties costing in excess of £500,000 will be charged at the normal rates.

IHT residence nil rate band

From 6 April 2017, a new nil rate band, called the ‘residence nil rate band’ (RNRB), was introduced, meaning that the family home can be passed more easily to direct descendants on death. The RNRB is being phased in and is as follows:

  • For deaths in 2018/19: £125,000
  • For deaths in 2019/20: £150,000.
  • For deaths in 2020/21: £175,000

These figures are per person, so a couple may benefit from double the allowance. There are a number of conditions that must be met in order to obtain the RNRB, which may involve redrafting an existing Will. Please approach a member of our tax team should you wish to discuss how this may affect your Inheritance tax planning.

Future Announcements

A summary of the future measures that have already been announced and that are applicable to the world of tax are as follows:

Class 2 and 4 National Insurance contributions (NICs)

Despite a previous announcement, the Government has confirmed that Class 2 NICs will no longer be abolished. 

Capital Gains Tax: Payment date

The introduction of the proposed 30-day window for paying tax on gains from a disposal of residential property is to be deferred until April 2020.

Main residence capital gains tax relief

Where a property is used as the owner’s only or main residence throughout the ownership period, any gain on disposal is exempt from CGT. From 6 April 2020 restrictions are being introduced which could increase your capital gains. If you are selling a residence that you had previously lived in as your main residence which was then perhaps let, or left vacant for a period prior to sale, you will be affected by the rule changes. A review of the situation prior to April 2020 may be appropriate.

Non-Resident capital gains tax

Since 6 April 2015, any gains on residential property realised by non-UK Residents are within the scope of CGT. The scope will be extended to non-residential property with effect from 6 April 2019.

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