The end of the tax year is fast approaching and this is always a good time to ensure your tax house is in order. With this in mind, we’ve put together some top tips for things that you should consider before 5 April 2016.
- Your rate of tax
First of all, be sure you’re paying an appropriate rate of tax. Individuals liable for the additional rate – and those subject to an effective rate of 60% because of the phased removal of the personal allowance – can take a number of steps. In some cases, you may want to transfer assets to your spouse or civil partner, (if you are happy with that commercially), or preserve your personal allowance by increasing pension contributions or donate to charity.
Whatever you do, consider whether your investments are held in the most sensible structure, particularly with corporation and dividend tax changes on the horizon. It’s also important to keep adequate records of your income and gains in the event of an enquiry – you may be required to retain your underlying records for up to five years.
- Property matters
From April 1, higher rates of Stamp Duty Land Tax (SDLT) will apply to purchases of investment properties and second homes for £40,000 or more – 3% above the current rates. And in Scotland, the Scottish Government has said the rates of Land and Buildings Transaction Tax (LBTT) will also increase by 3%. Those purchasing investment properties or second homes, on both sides of the border, will need to bear these changes in mind.
But, where a property is used as the owner’s only, or main, residence throughout the period of ownership, any gain on disposal is exempt from Capital Gains Tax. It’s worth noting that married couples and civil partners can only have one exempt residence between them. And if you rent out furnished property, keep in mind that the 10% wear-and-tear deduction is being replaced with specific tax relief for the costs of replacement furnishing from 2016/17.
- Capital Gains Tax
There are myriad aspects to consider when it comes to Capital Gains Tax. Remember that you can claim capital losses to offset any gains arising in the current or future tax years. Likewise, if you’re an entrepreneur, be sure to make the most of entrepreneurs’ relief, while all individuals have annual capital gains exemption of £11,100 (2015/16 rates) – including spouses and children. You may also gift a spouse or civil partner an asset without incurring a tax liability.
The annual allowance for tax-deductible pension savings has been set at £40,000 per annum since 6 April 2014. But from 6 April this year, that will change for individuals earning more than £150,000, so be sure to make the most of annual contributions. Equally, you’ll also need to consider your overall contributions, with the ‘lifetime allowance’ being reduced from £1.25 million to £1 million from 6 April 2016. Make sure you file for one of the various protections available if this is appropriate for you.
- Current exemptions and allowances
Individuals are entitled to a number of exemptions and allowances each tax year, the main ones being: inheritance tax exemption on gift of up to £3,000, stakeholder pensions of £3,600, Individual Savings Accounts (ISAs) subscription of £15,240 and Junior ISAs up to £4,080.
- Tax efficient investments
There are a number of statutorily provided tax efficient investments available, including National Savings, the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS), the Social Investment Tax Relief (SITR) and Venture Capital Trusts (VCTs). All of these have the following annual limits:
- EIS - £1,000,000 with income tax relief of 30%;
- SEIS - £100,000 with income tax relief of 50%;
- SITR - £1,000,000 with income tax relief of 30%;
- VCT - £200,000 with income tax relief of 30%.
In general, any gains realised on these investments, and loans in the case of the SITR, may be exempt from CGT.
- Offsetting losses against income
Certain losses can be offset against your income. But a cap on these was introduced from 2013/14 onwards, applying to specific types of relief. The cap is the higher of £50,000 or 25% adjusted total income and, where a loss can be relieved in more than one tax year, the cap will apply to each tax year affected.
- Claims and elections
A number of claims and elections relating to the 2011/12 tax year have a time limit of 5 April 2016, and so need to be considered before that date. These include relief for tax overpaid in 2011/12, capital losses on disposals in the same year and a one-off election regarding capital losses for those non-UK domiciled who first claimed the remittance basis in 2011/12. This latter issue is complicated, so please get in touch to discuss further.
- Inheritance tax
Generally speaking, 40% inheritance tax is payable on the value of an estate on death, subject to any exemptions available. Lifetime planning can reduce the overall inheritance tax due, which should be reviewed, along with your will, at regular intervals. You should also ensure that the conditions for any available exemptions are met. Pension benefits and charitable legacies are another point of consideration.
These pointers are just the tip of the iceberg when it comes to reviewing your year-end tax affairs – there’s a great deal more to each of them. If you have a question about how to handle your tax matters, get in touch.
You may also be interested in:
Get ready for SRIT part II: four steps you can take ahead of April 2016
Get ready for SRIT part I: what does it all mean?
Five checks for Scottish property deals ahead of LBTT
Scotland’s future: devolved tax powers