Oddly, those thoughts came into my mind yet again when I read the many commentaries and predictions both before and after the Chancellor’s Spending Review last month. Inter alia:
- Capital Gains Tax – will it be brought into line with Income Tax and/or will rates be be raised to help cover covid-driven government spending?
- Income Tax – will personal allowances be frozen at current rates?
- Inheritance Tax – will it be changed to make it more understandable (following the report from the Office of Tax Simplification)?
- Pensions – will current pensions allowances and tax reliefs be reduced, especially higher rate relief?
So many imponderables! But, when or if or to what extent any changes are made, it’s a timely reminder to plan in order to be as prepared as we can be for whatever those winds bring.
“Planning” is the process of deciding in detail how to do something before you actually start to do it – it’s sensible and it’s what we do!
And the end of the tax year is just a few months away …
Key Checks
First and foremost, you need to check your liquidity against your income and capital needs over the short, medium, and longer term. Having done that, in the context of your financial planning needs, you should check if there are any prudent Income Tax or Capital Gains Tax or Inheritance Tax steps you can take before the end of the tax year, and then ensure that you take action in time. Here are some questions to have in mind during the review. It is not a comprehensive list and it is in no priority order.
Income Tax
Income Tax Rate Bands – Can you make use of lower rate tax bands, e.g. by transferring income producing assets to spouse (in these notes, ‘spouse’ also includes a ‘partner’ in a civil partnership) or to a tax efficient investment structure such as an ISA or investment bond (but be aware of any anti-avoidance or settlements provisions)?
Personal Allowances – Will you use them to the maximum extent possible for yourself and/or your spouse, or lose them as they cannot be carried forward?
Married Couples/Civil Partnerships – Is there any scope to utilise each person’s personal reliefs, as well as their Savings Starting Rate (up to £5,000 of interest tax-free) and Basic Rate Tax bands?
Dividend Nil Rate Band – Do you, or could you, receive dividends? The first £2,000 of dividend income received in the tax year is free of income tax.
Personal Savings Allowance – Are you, and/or your spouse, a basic rate taxpayer who can take advantage of this opportunity? The first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) of savings income is taxed at 0%.
Pension Contributions – Are you contributing the appropriate amount in the context of your retirement income targets? Achieving those targets is our first aim, but the contributions will also produce significant tax savings.
Capital Gains Tax
Annual CGT Allowance – Do you and/or your spouse (also children) use your annual CGT exemption? The annual exemption (currently up to £12,300 per person, £6,150 for trusts) cannot be carried forward, and will be lost if not used.
Individual CGT Allowances – Can you consider transferring assets to a lower earning spouse? There may be an opportunity to utilise their basic rate band so that CGT applies at 10% rather than up to 20% (18% and 28% for residential property).
Sale to and Repurchase by Spouse – Is there any opportunity for one spouse to sell an asset and for the other spouse to repurchase it (Bed & Spouse)? This action could also be used to establish a loss that can be set against gains.
Sale and then Shelter Future Gains – Can you consider selling an investment (caveat – investment considerations should be the driver here and throughout, not tax) to transfer the proceeds to an ISA where future gains will be sheltered from CGT?
Straddling the Year End – If you plan to sell an asset, can you spread the sale across this and the next tax year to benefit from two sets of exemptions and to eliminate or reduce CGT?
Inheritance Tax
Annual Exemption – Can you wish to consider gifting up to £3,000 this tax year? Up to that amount will be free from CGT.
Carry Forward of Annual Exemption – Did you fully utilise your Annual Exemption in the last tax year? If not, and only after you have used this year’s allowance, you can bring forward any unused allowance to this year, but only to this year.
Bear in mind throughout any review process that when making decisions regarding your assets, particularly when considering selling or transferring, those decisions are often best driven by investment rather than tax considerations. Also, there may be other considerations to take into account, such as anti-avoidance provisions or the implications of any change of beneficial ownership.
NB The notes above are necessarily brief and only cover some of the main points. If you think any of the above may apply to you, we recommend that you take timely advice from an appropriate professional adviser.
We are here now to help so please do not hesitate to contact us regarding your financial planning situation. Reviews and our Lifetime Financial Planning Service are all part of our added-value services for our clients.
We have set out above what is only a brief summary of some key points that involve quite complex considerations. Allowances, caps, levels and bases of, and reliefs from, taxation are subject to change and their value to you will depend upon your personal circumstances. Information and data may change after the date of their original promulgation in our Newsletter or this Focus article. Always seek relevant professional advice before taking, or refraining from taking, any action.
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