20 Feb Countdown to tax year end
The end of the tax year is fast approaching (April 5th) and it is never too early to take action now to give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.
Below we have outlined some simple tax planning strategies for your investments and finances to help you reduce your exposure to tax.
The content of this article is for information purposes only.
No individual or company should act on this information before seeking appropriate independent professional advice first.
Maximise your pension contributions
Pensions offer a tax-efficient way to invest for your retirement. A pension fund grows tax-free and any contributions you make into the plan also receive tax relief from the Government.
But you are restricted to how much you can place into a pension each year – this is known as the Annual Allowance. This is £40,000 but starts to be reduced for those earning over £150,000 per year, potentially to as low as £10,000.
The good news is that pension annual allowance can be carried forward for 3 years providing you were a member of a registered pension scheme during that period. Any unused allowance for the last 3 years can be added to your current allowance (potentially giving you a maximum contribution of £160,000) and will attract tax relief at your marginal rate.
For those of you that run your own company, there may be also an opportunity to extract profits tax efficiently by making this contribution through your company, which can help you reduce your corporate tax liability and may be an excellent way to move money from your Company to your personal name! The last opportunity to utilise any available carry forward allowance available from the 2016/2017 tax year will be the 5th of April 2020. Although please note your pension provider may have an earlier cut-off date for processing the payments in time.
Clearly Pensions remain an efficient tool for tax an investment planning, however, they are also considered to be one of the most complex areas of financial planning so specialist advice is essential as an innocent oversight could cause the raft of unwanted tax and other issues.
Consider tax efficient Investments
Individual Savings Accounts (ISAs)
ISAs are entirely free of both income and capital gains taxes so they are very useful investment wrappers and tend to be the backbone of most people’s wealth building process.
Therefore, it is important that before the end of the tax year you use your annual ISA allowance if you are able to do so you.
Currently up to £20,000 can be put into an ISA. Any unused ISA reliefs are not transferrable for future year, therefore it is important to take action and use your full ISA allowance before April the 5th. Furthermore you can also invest for your Child into a Junior ISA in their name. The maximum allowable amount per Child ISA is £4,260, and as the standard ISA rules any unused allowance is lost and cannot be carried over to the new tax year, so as it is often said: use it or lose it!
Enterprise Investment Scheme (EIS), SEED EIS (SEIS) and Venture Capital Trusts (VCT)
It is also possible to obtain additional tax relief by acquiring tax efficient investments. For some high-income individuals who are restricted in their ability to make pension contributions, they may find that such investments are the only realistic options to mitigate some of their income tax.
However, these investments tend to be more adequate for sophisticated investors. They are wrappers that tend to invest in small businesses in the UK, they therefore attract very generous tax reliefs breaks from the Government. The downside is that these investments also tend to be more volatile and less liquid than ordinary listed shares.
Therefore if you are considering investing in EIS, Seed EIS or VCTs it would be invaluable to obtain the advice of an Independent Financial Adviser first.
Below are some of the wrappers that you could invest in before the end of the tax year:
Enterprise Investment Scheme (EIS)
EIS invest in qualifying unquoted companies and allows income tax relief at 30% of up to £1 million in 2019/2020. This means that your income tax bill for the year could be reduced by up to £300,000!
It is also possible to carry back relief to the 2018/2019 tax year if the £1 million limit was not utilised last year.
EIS also carry additional tax benefits:
- If held for 3 years the EIS gains are exempt from Capital Gains Tax
- EIS loses could be offset against your future taxable income, rather than Capital Gains tax
- Other capital gains can be deferred to the same amount that you invest in the EIS Investment.
- The investments in the EIS could also qualify for Business Property Relief and if held for more than 2 years it can be effectively free from Inheritance tax
SEED Enterprise Investment Scheme (SEIS)
Like the EIS the SEED EIS rewards investors with very significant tax savings when they invest in young and small companies that qualify for SEIS status.
The difference is SEIS-qualifying companies are even smaller and younger than EIS-qualifying companies, so even riskier. To help compensate for the additional risk, the government offers even more generous tax savings:
- 50% Income tax relief
- Free from Capital Gains tax if held for 3 years
- In the event of capital losses, it can be set against your general income
- The shares in the SEIS could also qualify for Business Property Relief and if held for more than 2 years be effectively free from Inheritance tax
Venture Capital Trust (VCT)
A VCT is a collective investment fund that invests in qualifying companies that are not listed in the main London Stock Exchange. You can invest up to £200,000 per year in VCTs and claim a number of tax incentives:
- Upfront Income tax relief of 30% of the amount you invest, provided you keep your VCT shares for at least 5 years. So if you invest £100,000, £30,000 can be taken off your tax bill
- Free of capital gains tax if you decide to sell your VCT shares
- VCT dividends are tax free, and you will not have to declare them on your tax return
While all of the above are great tax incentivised investments, not all the options will be suitable for everyone. Any investment decision should be made with a view to all relevant circumstances, and each individual case will be different.
If you hold other Taxable Investments try using your Capital Gains Allowance
Each individual has the first £12,000 of gains made from their investments in 2019/2020 free from CGT. As this annual exemption cannot be carried forward it will be lost if not used.
You therefore could consider selling assets and realise gains from non-tax efficient investments before the end of the tax year.
Also transferring assets to a lower earning spouse may create an opportunity to utilise their basic rate band of CGT, so the tax paid would be 10% rather than 20% for a higher rate taxpayer.
However, the decision to sell assets should always first be driven by investment considerations rather than tax. A very true saying is that “the tax tail should not wag the investment dog!”.
Inheritance Tax is charged at 40% on estates over £325,000.
There are a number of annual Inheritance tax allowances, which are tax year sensitive and therefore worth mentioning. By using them you can reduce any potential Inheritance tax liability bill payable on death.
Each year you can give away:
- £3,000, the limit increases to £6,000 if the previous annual exemption was not used. As a married couple you can therefore make a total exempt gift of £12,000, this simple technique could save a possible Inheritance Tax bill of £4,800!
- Up to £250 a person (but not in conjunction with any other Inheritance Tax allowance).
Investment and Pension advice are regulated activities so you should speak with an Independent Financial Adviser. For more information or to arrange a no fee, no obligation initial consultation please contact us.
The value of investments can go down as well as up and so you may get back less than you originally invested.
Turner Wealth & Consultancy
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Registered in England and Wales. Registration number 11619221.Turner Wealth & Consultancy Ltd is an Appointed Representative of Vision Independent Financial Planning Ltd which is Authorised and Regulated by the Financial Conduct Authority (FCA).