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Tax planning for year end

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As the end of the tax year approaches there are certain planning opportunities for taxpayers to be aware of.

Income Tax

There are several thresholds to avoid otherwise you may pay more tax than you need to. If you can control the timing of your income such as bonuses or dividends then be aware of the following:

There is no tax on the first £5,000 of dividends, and this ‘Dividend Allowance’ is reducing to £2,000 from 6 April 2018. Make sure you use the allowance for 2017/18 where possible.

For those receiving interest there is a Personal Savings Allowance (PSA) of £1,000 for basic rate taxpayers, and this is £500 for higher rate taxpayers (there is nothing for additional rate taxpayers).

Where income exceeds £100,000 the personal allowance is reduced by £1 for every £2 of income in excess of this amount. The full personal allowance is therefore lost if income exceeds £123,000. You may look to defer a special dividend until the next tax year to make sure your income does not exceed £100,000.

Those claiming child benefit should be aware that the High Income Child Benefit Charge applies where income for either partner in a household exceeds £50,000. If you can ensure income is allocated equally between partners and spouses to keep each of you below £50,000 then this could be worthwhile.

The income calculations for the above are based on adjusted income, and this can be reduced by making payments to charity through gift aid, or personal pension contributions. Advice should be sought when making pension contributions as there are a number of factors to consider and the calculations are complicated.

For married couples it may be possible to make a marriage allowance transfer. One spouse needs to be a basic rate taxpayer with the other being a non taxpayer. The maximum saving from making the claim is £230.

 

Capital Gains Tax (CGT)

The Annual Exemption for 2017/18 is £11,300. There is no option to carry forward any unused exemption; it may therefore be worthwhile crystallising gains in the year to use this exemption. Watch for the “bed and breakfasting” rules which can apply to shares sold and repurchased within 30 days.

The rates of CGT are 10% for gains which fall within the £33,500 basic rate band and 20% for gains in excess of this.

For gains on residential properties the rates are 18% and 28% respectively (note that commercial properties are taxed at the lower rates of 10% and 20%).

Gains which are eligible for Entrepreneurs’ Relief (ER) are taxable at 10%, subject to a Lifetime Limit of £10m. Only certain assets qualify for ER, such as the sale of a business carried on by a sole trader or partnership, or shares in certain unlisted trading companies.

 

Other points

  • The tax relief on mortgage/loan interest for residential buy to let investors is restricted for higher and additional rate taxpayers. This restriction started in April 2017 and is being introduced gradually over four tax years. By 2020/21 tax relief on all mortgage/loan interest will be restricted to tax relief at 20%.

 

  • The Inheritance Tax (IHT) nil rate band is frozen at £325,000 until 5 April 2021. An additional relief has been introduced gradually from April 2017 for homes being left to direct descendants. From April 2018 a married couple will potentially be able to transfer an estate (including their home) worth up to £900,000 to their children.

 

  • The Annual Allowance for pensions remains at £40,000 (gross). Care should be taken when making contributions as there are a number of other factors to consider such as having sufficient ‘relevant earnings’ and also the lifetime limit.

For further reading please see the MHA Year End Tax Planning Guide.

If you would like to discuss the above blog in more detail, or you would like to speak with a member of our team, please contact Tom Carter or call 01772 821021 to be put in contact with a member of our Tax and VAT team.