Legally minimising or mitigating taxation on current and future tax liabilities before 6 April 2015

Tax planning is a very complex area covering many forms of tax. No one likes paying more tax than they legally have to, but one of the challenges of wealth is the high taxation it attracts. For some individuals the need for specialist professional advice has never been greater. With the current tax year end rapidly approaching, we’ve provided some tax planning areas for you to consider before 6 April 2015.

 

Income Tax

If appropriate, consider transferring income (for example, interest or dividends) by transferring investments between you and your spouse or registered civil partner, to ensure use of all personal allowances and to minimise the income taxed at the higher rates of 40% (£31,866 and above of taxable income) or 45% (additional rate band over £150,000).

If your net income for 2014/15 will exceed £120,000, you will not receive a personal allowance so consider mitigating this by making a pension contribution or Gift Aid payment. A full personal allowance is available if your taxable income is £100,000 or less.

Child benefit is taxable where chargeable income exceeds £50,000. The tax rate increases in line with income and reaches 100% where income is more than £60,000 (i.e. child benefit is fully clawed back at that point).

If you are close to these thresholds, pension contributions and Gift Aid donations can be used to reduce income and retain the entitlement to tax-free child benefit. Alternatively you can ask HM Revenue & Customs (HMRC) not to pay child benefit in the first place to avoid having to declare it on your tax return.

New Individual Savings Accounts (NISAs)

Income and capital gains in NISAs are tax-efficient. The annual allowance is £15,000, all of which can be put into a Stocks & Shares NISA, Cash NISA or combination of both.

Shares in newer, less established companies which are ineligible to join the main stock markets (FTSE100 or FTSE250) are allowed to be held within a NISA, making them one of the most tax-efficient investment vehicles as they also benefit from Inheritance Tax (IHT) relief after two years.

Pensions

You can contribute up to £40,000, inclusive (where applicable) of the 20% pension tax relief recoverable from HMRC by the pension scheme, and obtain full tax relief at your marginal income tax rate(s).

Unused pension relief can be carried forward three years in some cases, so any relief from the year ended 5 April 2012 not utilised by the 5 April 2015 will be lost.

A pension fund grows largely tax-free, which can help to increase the amount you have in your fund. (Remember that the value of your fund can go down as well as up and you may not get back your original investment.)

If you haven’t earned income you could still receive tax relief at 20% on the first £2,880 (i.e. £3,600 will go into your pension pot) you pay into a pension each tax year (6 April to 5 April).

Inheritance Tax (IHT)

Make sure that you have a Will and review it periodically to ensure that it still leaves your estate to those you intend and that it remains tax-efficient.

The IHT annual exemption of £3,000 in aggregate on gifts to individuals is £6,000 for 2014/15 where you did not use this exemption in 2013/14 and can reduce your estate.

Gifts of up to £250 to any individual during 2014/15 are also exempt from IHT.

Increased relief for gifts is available if made in consideration of marriage or registered civil partnership. Other gifts to individuals made during your lifetime which are potentially exempt transfers (PETs) will be disregarded when calculating any IHT due on your death once you have survived seven years from the making of the gift.

Gifts into trust can be considered up to your (unused) nil rate band of £325,000 without creating an IHT charge at lifetime rates; however, published draft measures prevent multiple use of the nil rate band.

Regular gifts made out of your income that are not needed to support your usual standard of living are IHT exempt, even if made within seven years before death, and should be carefully recorded.

With an appropriate review of your investment risk profile, shares in unquoted trading companies, including those listed on AIM, can qualify for business property relief once held for two years, thereby effectively removing their value from your estate.

If you have been resident for 17 out of the last 20 tax years you will be ‘deemed domiciled’ for IHT purposes and therefore subject to IHT on your worldwide assets. If this applies to you, action should be taken to mitigate the impact.

Capital Gains Tax (CGT)

The CGT annual exemption for 2014/15 is £11,000 and, if not used by 5 April 2015, cannot be carried forward.

For sophisticated investors, capital gains arising in 2014/15 can be deferred (or avoided completely) through investment in Enterprise Investment Scheme and Seed Enterprise Investment Scheme qualifying companies as well as in qualifying social enterprises.

INFORMATION IS BASED UPON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

ESTATE PLANNING, TRUST PLANNING, TAX PLANNING AND WILL WRITING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.