Minimise tax for the current year (ending 5 April 2019)
With the dust already beginning to settle on this year’s Tax Return filing season, it is now, traditionally, the time to consider any measures that will help to minimise tax for the current year ending 5 April 2019 and strategies for the following year ending 5 April 2020.
For several years now, the existence of a Chancellor of the Exchequer’s statement alongside the Budget has meant that changes to the likes of allowances and rate bands are known a year or two in advance.
For many in business with a 31 March or 5 April year end, now is a good time to reappraise things but it can also be an opportunity to refocus for those with other year ends and for individuals too.
The old saying of the tax tail not wagging the dog is still relevant and some aspects will also require the advice of an independent financial adviser. Our own advice is best captured in this free-to-use table of measures. Click here to download.
Planning points
Income Tax
Ensure that Tax Returns are filed and tax payments are made on time to prevent exposure to penalties, interest and surcharges.
For all couples ensure that the personal allowance (£11,850 for 2018/2019 and £12,500 for 2019/2020) and the basic rate band (£34,500 for 2018/2019 and £37,500 for 2019/2020) are utilized.
Where neither spouse pays higher rate tax, it is possible to transfer up to 10% of the personal allowance from one spouse to the other, most effective where one spouse has no income (tax saving of £1185 @ 20% for 2018/2019 and £1250 @ 20% for 2019/2020).
Reduce income below £150,000 to avoid 45% tax. payment of pension contributions; charitable donations or reallocating income sources between spouses are ways of reducing taxable income.
Also consider moving cash balances on deposit or income producing investments from the higher rate or additional rate spouse to the non-taxpaying or basic rate spouse and consider tax free investments such as ISAs.
Utilize the personal savings allowance that permits the first £1,000 of savings income to be untaxed for basic rate taxpayers and the first £500 for higher rate taxpayers.
Ensure that the dividend allowance is fully utilized. The first £2,000 of dividend income is exempt and so ensure that this exemption is used by shareholder directors of private companies and that shares held as investments are held in a tax efficient way. Once the exempt amount is exceeded dividends are taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers and so there is still further scope at this point to ensure that dividend income is taxed in the most efficient manner. Despite the increase in dividend taxation in recent years, it is important to remember that they don’t attract any form of National Insurance liability and so continue to be more efficient than the likes of a higher salary, bonus and benefits in kind.
The tax due on company car benefit increases year upon year with a tightening of the CO2 emissions continuing. Consideration should be given to reviewing if your current company car is as tax-efficient as it could from list price and CO2 factors and whether it might be beneficial to switch to using your own car and claiming tax free mileage allowances of 45p per mile for the first 10,000 business miles travelled and 25p per mile thereafter.
The company car fuel benefit has increased to an even greater extent and it now requires a significant amount of private mileage to make this benefit financially viable. Consider reimbursing your employer for the cost of the fuel used for private travel or forgoing the benefit and claiming for business travel only on a pence per mile fuel rate.
Capital Gains Tax
Utilize the annual exemption (£11,700 for 2018/2019 and £12,000 for 2019/2020) since, if unused, it can’t be carried forward.
If a disposal will produce a gain in excess of the annual exemption, look to spread it if possible across two tax years to enable the use of two annual exemptions. If not them consider deferring the sale until after 6/4/2019 to push back the payment date for the Capital Gains Tax until 31/1/2021.
Ensure that any losses are used to reduce gains arising. In-year losses must be set off in their entirety but accumulated losses need only be used to reduce gains down to the level of the annual exemption.
If an asset is standing at a loss, consider a sale to crystallise that loss.
If the asset is shares, consider gifting some from one spouse to the other to secure an additional annual exemption and possible taxing the gain at a lower rate (inter-spouse gifts are Capital Gains Tax free).
Entrepreneurs’ Relief provides a 10% Capital Gains Tax rate on the first £10m of qualifying lifetime gains arising on the disposal of all or part of a trade carried on alone or in partnership; assets of such a trade following cessation or shares or securities in an individual’s personal trading company. The 2018 Budget added to the existing qualifying conditions for the disposal of shares or securities after 6/4/2019.
There are new rules attached to the sale of a main residence from 6/4/2020. From that date, the Capital Gains Tax exemption available for the final 18 months of ownership will reduce to nine months and, if the home was ever let, the lettings relief of up to £40,000 of the gain will only be given if occupation is on a shared basis with the tenant.
If two homes are owned, only one can be regarded as a main home and so subject to Capital Gains Tax reliefs. It may be beneficial to elect for the home that has a higher Capital Gain attached to it or is likely to be sold first. It is also possible to switch the claim as to which is the main home and which can have some beneficial Capital Gains Tax reliefs when both properties are considered together. It is important to note that there has to be demonstrable occupancy of a property.
Inheritance Tax
Make sure there are wills in existence and are reviewed every three years.
Bear in mind that the nil rate band of £325,000 has been frozen since 2009 and is set to remain at this level until at least April 2021.
Ensure that the £3,000 annual gifts exemption is used. The previous year’s £3,000 exemption is also available if unused and any unused part of the current year’s exemption can be carried forward and used after the in-year £3,000 has been used.
A person can make any number of £250 small gifts to an individual providing the recipient does not also benefit from any part of the £3,000 annual exemption.
Gifts can also be made for marriages and civil partnerships of £5,000 by a parent; £2,500 by a remoter ancestor or party to a marriage or civil partnership and £1,000 by any other person.
Gifts can also be made out of normal expenditure if it can be shown that they are made as part of a routine income and expenditure scenario, are paid out of income and the gifts leave the donor with sufficient income to maintain their usual standard of living.
Business Tax
Consider a change in accounting year end for sole traders and partnerships to utilize historic overlap relief.
Sole traders to consider forming a partnership by introducing a spouse and looking at a tax-efficient split of profits.
The 2018 Budget introduced an Annual Investment Allowance of 100% for the first £1m qualifying expenditure on plant and machinery from 1/1/2019 for two years. Where a business has a chargeable period that straddles the starting or end dates then transitional rules apply in calculating the entitlement and maximum figures.
Buy to let Properties
The reduction in tax relief on buy to let loans will see the relief for 2018/2019 whereby 50% of the interest is deductible from rents and the remaining 50% providing 20% basic rate relief only move for 2019/2020 to 25% being deductible and the remaining 75% providing basic rate relief. From 2020/2021 all of the interest will attract basic rate relief only. Consideration should be given to reviewing borrowings on buy to let properties to see if they can be reduced and to how the properties are owned between joint owners and married couples.
Child Benefit
This benefit is clawed back when the annual taxable income of the highest earner exceeds £50,000 and lost altogether when income reaches £60,000. Consideration should be given to using the reallocation of income producing assets and the making of pension contributions or exchanging salary for employer pension payments to take income below the threshold. If this isn’t possible then consider claiming the benefit but electing not to receive it.
Investments
ISAs
UK residents over 18 years of age can invest up to £20,000 each and parents can fund a junior ISA (up to £4,260 for 2018/2019 and £4,368 for 2019/2020). Help to buy ISAs can be opened up to 30/11/2019 for first-time house buyers and which, once opened, can continue until 30/11/2029. The maximum monthly savings amount of £200 with an additional £1,000 able to be deposited upon opening. There are limits applying to the claiming of the Government bonus and property values for London and elsewhere in the UK.
Seed Enterprise Investment Scheme
Investing in qualifying start-up businesses can produce 50% tax relief on an investment of up to £100,000 with the potential, subject to the amount of any investment for the previous tax year, to carry the investment back and claim tax relief in the previous year.
Enterprise Investment Scheme
Investing in qualifying companies such as AIM-listed or unlisted companies attract tax relief at 30% on a maximum £1m annual investment (£2m for 2018/2019 onwards where the investment is in a qualifying knowledge intensive company). There are also, potentially, some Capital Gains Tax-related reliefs.
Venture Capital Trusts
Investment is in smaller and unlisted companies with tax relief of 30% on qualifying investments up to £200,000. There are related dividend income and Capital Gains Tax reliefs.
Pension Contributions
Pension contributions continue, in addition to providing for one’s income in retirement, to attract higher rate tax relief and can help, dependent upon income levels, to retain the personal allowance where income exceeds £100,000 and Child Benefit where income exceeds £50,000.
There has been a tightening of the limits on annual and lifetime contributions as well as allowing more pension flexibility for the over-55’s and so the appropriate specialist advice based on the individual’s circumstances should be taken.