There are some practical tax points worth checking out prior to the tax year-end (5 April 2015) so that all available tax allowances and exemptions are utilised, and this article explains the main points of relevance.
Note that it deals with the position of UK resident taxpayers only, and in particular does not comment on the changes to the taxation of non UK-residents owning residential property in the UK, which will apply from 6 April 2015.
Paying tax at an appropriate rate
Taxpayers whose income exceeds £150,000 currently pay 45 % tax on the excess income over this amount.
Furthermore, because the personal allowance is phased out where an individual’s income exceeds £100,000, the effective marginal rate of tax is 60 % on income between £100,000 and £120,000 for 2014/15.
Individuals in this situation may want to consider some of the following straightforward options.
Transferring assets to spouse or civil partner
If a spouse has not utilised their personal allowance (£10,000 for 2014/15) or their basic rate or higher rate tax bands, normally 20 % up to £31,865 and 40 % rate on income between £31,866 and £150,000 (2014/15 rates), it may be sensible to gift sufficient income-producing assets to them to utilise their lower marginal tax rates.
In order for this to be effective, any gift to a spouse must be absolute and unconditional, and any practical considerations should be taken into account.
Note that (as mentioned above) the personal allowance is gradually removed for incomes in excess of £100,000, and this should be taken into account when considering how income should arise between spouses.
Tax relief is available for cash gifts to registered charities in the UK and certain charitable organisations in the EU, Norway and Iceland, although non- UK charitable organisations have to satisfy certain conditions.
For example, if a 45 % taxpayer makes a cash donation to a charity of £20,000 under the Gift Aid scheme, the charity may reclaim £5,000 from HM Revenue & Customs and the donor will obtain tax relief of £6,250 via their tax return. The overall effect is that the charity receives a £25,000 donation at a net cost to the donor of £13,750.
It is also possible to gift assets (e.g. quoted shares) to a charity. In this instance gift aid relief is not available but a straight deduction against income (based on the market value of the shares gifted) is given, therefore achieving a 20, 40 or 45 % tax saving, depending on the taxpayer’s marginal rate.
The disposal of these assets to the charity will not create a capital gains tax (“CGT”) liability for the donor.
Tax relief at the marginal rate is given for pension contributions within prescribed limits. This can be a very complex area and advice should be sought before making a contribution.
Capital Gains Tax (CGT) Matters
Use your annual exemption
Each individual has a capital gains annual exemption of £11,000 (2014/15).
An unused exemption cannot be carried forward and is lost. Consideration could be given to selling assets to realise gains if this is consistent with the overall investment strategy.
Note that anti-avoidance rules mean that if shares and securities are sold and repurchased within the following 30 days, the disposal will be matched with the later acquisition when the gain is calculated.
Gift to spouse prior to a disposal
It is possible to gift an asset to a spouse free of CGT. If the spouse were then to sell the asset the resulting gain on disposal may be covered by their CGT annual exemption and/or attract a possible lower rate of CGT of 18 % (rather than 28 %).
Similarly, a spouse may have unused capital losses and these losses could shelter some or all of the gains arising. Although transfers between husband and wife are exempt from CGT, any transfer must be absolute and unconditional.
It will be a spouse’s independent decision as to when and whether or not to sell the asset. Further more, anti-avoidance legislation may apply if artificial losses are relieved and professional advice should be taken in all but straightforward cases.
Maximising Entrepreneurs’ Relief (“ER”)
The CGT rate for higher rate taxpayers is 28 %. However, a 10 % CGT rate can apply to qualifying capital gains up to a lifetime limit of £10 mil lion where ER is available. The maximum possible tax saving is therefore £1.8 million.
If you expect to sell a business asset or shares in a trading company, you should review your personal tax position as soon as possible to determine whether ER, and therefore the 10 % CGT rate, is available.
In order to claim ER a number of conditions need to be met. If these conditions are not currently satisfied, action may need to be taken, but advance attention is key as there are certain qualifying conditions which must be satisfied for a period of at least 12 months leading up to a disposal.
Claiming tax relief for capital losses
If any assets or investments have fallen in value over re cent years, have now become worthless, or an individual has previously made any loans to a UK trading company (or other UK traders) which have become irrecoverable, a capital loss may be claimed which could offset capital gains arising in the current or future tax years (taxable at rates of up to 28 %).
Where the capital losses relate to shares in unquoted trading companies, it may be possible to offset this loss against your income, which would otherwise be taxable at rates of up to 45 % (however see the below section on the cap on losses relievable against income).
The conditions required to claim the loss and the claim itself can be complicated therefore you should discuss this with your professional adviser.
Certain claims, such as in respect of losses on disposal of assets or on irrecoverable loans to traders, must be made within four years of the disposal of the asset/loan becoming irrecoverable, and so claims need to be made by 5 April 2015 for losses realised and/or loans which became irrecoverable in 2010/11.
Cap on losses which can be offset against income
Certain losses (the main examples being trading losses, losses on unquoted shares and interest relief on qualifying loans) can be relieved by offsetting the loss against income.
A cap on the amount of losses which can be relieved in this manner was introduced for such losses made from 2013/14 onwards.
The cap is the higher of £50,000 or 25 % adjusted total income and, where a loss can be relieved in more than one tax year, the cap will apply to each tax year affected.
If you have losses which may be affected by the cap, you should review the level of income in the years in which the losses may be relieved.
You may also wish to consider the timing of expenditure as this is likely to affect the year in which the loss arises.
Where unquoted shares are held which are standing at a loss, the date of any disposal or negligible value claim should be carefully considered.
Other Tax Exemptions and Allowances
Finally, there are a number of other limits which operate per tax year and are lost if not used.
Inheritance tax annual exemption £3,000 p.a. - if the annual exemption in the previous year was not used then this can be carried forward to the following year only therefore creating an exemption of £6,000.
Stakeholder pension of £3,600 p.a. (gross) – tax relief at 20 % applies (£2,880 net pension contribution) and is available for children and adults up to the age of 75.
What to do next
Square One Law, Brewin Dolphin and Deloitte have joined forces to offer advice on personal finance from a wealth management, legal and tax perspective.
For general enquiries about financial planning, please call on 0191 230 7060. This number will take you through to the Brewin Dolphin team who will pass on your query to the relevant expert.
Alternatively, fill in the form below to outline your enquiry. Our experts will respond to your enquiry within three working days by your preferred method of contact. If you can't see the form below - click here to open in a new window.