The tax year end is approaching! - actions to consider

With the tax year end approaching here are a few reminders of actions which you could take to reduce your tax liabilities or maximise the use of allowances.

Income Tax

Ensure that you use your allowances

The personal tax allowance for 2017/18 is £11,500. In addition, basic rate taxpayers have a £1,000 personal savings allowance (£500 for higher rate taxpayers). This allowance covers interest receipts.

For 2017/18 the first £5,000 of dividends are tax free. Dividends in excess of £5,000 are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate payers and 38.1% for additional rate payers. Please note that the dividend allowance is reduced to £2,000 for 2018/19.

The personal allowance is reduced by £1 for every £2 that your adjusted net income is above £100,000.

Strategies to make full use of allowances

• transfer income producing assets, such as interest bearing accounts and shares, to your spouse
• company owners can have a degree of flexibility about the timing and the form of income to take. Often a combination of small salary together with dividends offers the most tax efficient strategy. The precise strategy will vary depending upon the individual circumstances of the owners of the company and the profitability of the company.
• pension payments can be made to reduce tax payable on higher rates. This is particularly useful if the income is in the £100,000 to £123,000 bracket, where the effective marginal rate is 60%.
• gift aid payments have a similar effect to pension payments

Tax enhanced investments

Pension schemes

Approved pension schemes are the most used form of tax shelter. There are detailed rules on the level of annual contributions and lifetime allowances. Investors whose taxable income is in excess of £150,000 need to be aware that their annual allowance (usually £40,000) is reduced by £1 for each £2 that their income exceeds £150,000. The maximum reduction is £30,000, so anyone whose income exceeds £210,000 will have an annual allowance of £10,000.

ISA's

ISA's remain a popular savings vehicle as all income and gains arising from qualifying investments are tax free. The annual allowance is currently £20,000.

In addition, there are now Lifetime ISA's and Help to Buy ISA's. Lifetime ISA's are open to individuals aged between 18 and 40 and enable the individuals to save up to £4,000 per year. A bonus of 25% of the contribution is paid by the Government at the end of the year. Withdrawal can be made to buy a first home up to a value of £450,000 or from the age of 60.

The Help to Buy ISAs allow contributions of up to £200 per month. A bonus of 25% is payable if the account is used to buy a property worth up to £250,000 (£450,000 in London).

Enterprise Investment Scheme (EIS) 

Investments in qualifying unquoted companies trading in the UK can be eligible for both income tax and capital gains tax advantages. There are numerous conditions but if eligible shares are held for at least 3 years the investment may be eligible for 30% income tax relief. Any gains arising from a disposal of eligible shares is exempt from capital gains tax. Investments in EIS shares can be used to defer gains on the disposal of other assets.

In addition, seed enterprise investment scheme (SEIS) gives a 50% income tax relief. This relief is only available to smaller companies with fewer than 25 employees and £200,000 of assets. There is also a maximum investment of £100,000 permitted.

Venture Capital Trusts (VCT's)

Investment in qualifying ordinary shares in a VCT are eligible for a 30% income tax relief. There are also capital gains tax reliefs.

Capital Gains Tax

Annual exemption

The annual exemption for 2017/18 is £11,300. This relief cannot be carried forward, so if you have shares etc standing at a capital gain you should consider selling enough to utilise your annual allowance. Proceeds from sale can be used to buy other shares or invest in an ISA, for instance.

Entrepreneurs Relief

If you own a trading business or shares in a trading company you may be eligible for a lower rate (10%) of tax if you sell.

In order for shares to qualify the company must not have "substantial" non trading activities. This is a complicated restriction and you should take advice if the company has any investment assets (including surplus cash).

In order to qualify you must :

• have owned the shares for at least a year before sale
• be an employee and/or a director of the company for a year before the sale
• own at least 5% of the shares

Inheritance Tax (IHT)

Annual gifts of capital of £3,000 can be made which are totally exempt from IHT. Any unused allowance from the previous year can be used in the current year.

The relief is clearly out of date and has not been increased since 1981. A review is currently being carried out by the Office of Tax Simplification

Let us hope they can recommend some useful improvements such as:

• increasing the annual allowance
• replacing the main residence nil-rate band with a universal relief

In the meantime, you should continually review your position and if you do not have a valid will ensure that you do one as a priority.

If we can help with any of these issues or if you need advice on any other tax matters, simply call us on 0113 398 1100 or email leeds@hwca.com