Tax planning is about ensuring the basics are done right.
But it is also about being mindful of some of the more nuanced rules and allowances so that clients are managing their investments in the most tax-efficient way possible.
If you’re in the throes of end of year tax planning, it's worth reminding yourself of the following tax tips:
- Gifting income producing assets to a lower-paying spouse or registered civil partner could increase the joint income.
- If your client has lost some or all of their personal allowance when income is over £100,000 or child benefit when income is over £50,000, they can regain some of it. This can either be done by contributing to a pension, depending on salary and any carry forward, or applying gift aid to extend the basic rate band. This is also key if a client's salary pushes them into the higher rate tax band.
- If your client is a non-taxpayer, or they can assign to one, there are ways to take gains from offshore bonds. They can use the starting rate for savings income of 0 per cent for the first £5,000, and the personal savings allowance, which is set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Calculations will need to be made to see what is suitable for each individual client.
- Remember to take natural income from Isas. Isas are normally a client's first port of call, and so should clearly form a part of a client’s financial plan.
Capital gains tax (CGT)
- Passing assets between spouses and registered civil partners is exempt from CGT. This means both CGT exemptions could be used (if available) and more could be withdrawn tax-free. Depending on the rates of income tax, this could also potentially push up the joint income if one is a lower rate taxpayer.
- Clients with losses on their investments must register these with HM Revenue & Customs within four years so they can be carried forward indefinitely.
- Certain clients may also be able to take advantage of entrepreneurs’ relief, subject to certain conditions being met and before rule changes come into effect in the 2020/21 tax year. Professional tax advice should be sought for clarification on this matter.
Inheritance tax (IHT)
- Annual exempt gift(s) of £3,000 should be made before the end of the tax year. This could be as much as £12,000 for a couple who have not used last year’s allowance. Other exempt gifts could also help reduce IHT liability and these should be explored with clients.
- Using trusts with life assurance and whole of life policies is a simple way to help reduce IHT, as is gifting investment bonds to trusts. As with anything, it’s important to choose the right trust for your client, and discussion around access to capital and income will be vital as most trusts are irrevocable.
Making pension contributions
- As you'll be aware, pensions are free from income tax, CGT and in most cases IHT, making them one of the most tax-efficient vehicles available.
- The annual allowance of £40,000 (plus any carry forward), along with the lifetime allowance of £1.03m for the current tax year has to be a consideration when looking at pension funding. Keep a watchful eye in terms of salary and the tapered annual allowance, as these may restrict how much clients can contribute.
- Tax relief (or deducted at source if in an auto-enrolment scheme) is a key benefit for pension schemes. If clients are higher or additional rate taxpayers, additional tax relief on their contributions can be sought via their self- assessment. It's worth bearing mind some of this tax relief will differ for Scottish taxpayers and, moving into the 2019/20 tax year, Welsh taxpayers as well.
Overall, there are many planning opportunities with different clients. Mastering both the basics and perhaps the less obvious tax planning strategies are key to a successful financial planning strategy.
For more information and support on tax year end planning, check out our A-Z of tax year end