In our latest Expert Opinion articles, Gary Hughes of Hallidays in Stockport, provides insight and tips on ways to reduce your tax liabilities.
Child benefit is gradually withdrawn where an individual’s taxable income (or the taxable income of a co-habiting spouse/partner) exceeds £50,000. Once income reaches £60,000 the child benefit received is withdrawn completely.
Converting salary into a tax free benefit (such as child care vouchers) or making additional pension contributions or charitable donations can reduce your income keeping it below the £50,000 threshold.
Capital Gains Tax
Where applicable you should consider the use of gifts by 5 April 2018 to utilise the capital gains tax annual exemption of £11,300.
Any assets standing at a loss, or assets which are considered to be of negligible value, can be sold before the end of the tax year to reduce gains incurred during the same period.
Under the no gain no loss rules spouses/civil partners can transfer assets between themselves free of capital gains tax. Such transfers should be considered in order to utilise two annual exemptions on the ultimate disposal of the asset. Such transfers can also reduce a CGT liability where one spouse/civil partner pays tax at a lower marginal rate than the other spouse/civil partner.
Consider utilising the following inheritance tax exemptions to reduce your taxable estate:
- Annual exemption of £3,000 (plus the portion of any unused allowance brought forward from the previous year)
- Small gifts exemption (£250 per donee)
- Gifts on marriage exemption (amounts depend on relationship between donor and donee)
- Regular gifts out of income exemption
Where possible a donor should consider making gifts of appreciating assets. If the donor survives seven years from the date of the gift the asset will fall out of their estate for inheritance tax purposes, potentially saving tax at 40% on such a disposition. However, depending on the nature of the asset gifted, capital gains tax may be chargeable.
Enterprise Investment Scheme (EIS) & Seed Enterprise Investment Scheme (SEIS)
Tax relief is available where you subscribe for shares qualifying for EIS or SEIS relief.
Under EIS your tax liability is reduced by 30% of the sum invested (up to a maximum investment of £1m in the year). The relief can also be carried back to the previous year. Additionally, capital gains made on asset disposals in the previous 12 months or following 36 months may be reinvested into EIS shares resulting in a deferral of the original gain already made.
Under SEIS you receive income tax relief at 50% of the sum invested (up to a maximum investment of £100k in the year). This relief can also be carried back one year. SEIS reinvestment relief provides a capital gains tax exemption against other taxable gains made in the year. Where such gains are reinvested in new SEIS shares 50% of the gains reinvested will be exempt.
Both EIS and SEIS shares are usually exempt from CGT and IHT provided certain detailed conditions are met.
Venture Capital Trusts (VCT)
Investments in VCT companies attract income tax relief at 30% on qualifying investments of up to £200,000. Dividends received from the fund are also tax free on the first £200,000 invested.
Provided the relevant conditions are met, any gains made on sale of the VCT shares will be free from capital gains tax.
Higher and additional rate taxpayers with surplus income should consider making additional pension contributions (subject to overriding limits) which will extend their basic and higher rate tax bands, meaning an overall lower marginal tax rate.
Ensure you have fully utilised your personal allowance for the year of £11,500. In-particular the transferable marriage allowance between basic rate taxpaying spouses allows a non-taxpaying spouse to transfer up to £1,150 of their unused personal allowance to their spouse.
Where income exceeds £100,000 the personal allowance is gradually withdrawn by £1 for every £2 of income up to a maximum of £123,000, creating a 60% marginal tax rate in this band of income.
To avoid this punitive tax rate and losing your personal allowance consider:
- Deferring income where possible
- Making additional pension contributions (subject to overriding limits)
- Making charitable donations qualifying for gift aid relief
- Personal Savings Allowance:
Basic rate taxpayers are entitled to receive £1,000 of tax free savings income, and higher rate taxpayers £500. The allowance isn’t available to additional rate taxpayers.
- Dividend Allowance:
All taxpayers are entitled to a £5,000 dividend nil-rate allowance (reducing to £2,000 from 6th April 2018).
Where possible you should make full use of your general annual ISA allowance of £20,000.
Help-to-buy ISAs allow first time buyers get a 25% cash bonus from the Government on savings made into a Help-to-buy ISA to help fund a property purchase.
Lifetime ISAs (LISAs) allow UK residents aged between 18-39 to contribute up to £4,000 per tax year (which counts towards the general ISA allowance of £20k). The Government will then add on a 25% bonus at the end of each tax year in respect of the contributions paid. There are strict conditions on what can be done with the money.
More from Hallidays here