YEAR END TAX PLANNING STRATEGIES
Take a few moments to review this guide, in which we highlight some simple tax planning strategies which could help you structure your affairs in such a way to help reduce your exposure to tax.
REVIEW
What you need to review before 6 April 2022
With the new tax year starting on 6 April 2022, now is the time to review both your businesses and your own personal tax situation, to make sure all tax reliefs and allowances available to you have been utilised in the current tax year.
It is also an ideal opportunity to take a wider review of your circumstances and plan for the year ahead.
With many individuals and businesses likely to have been impacted by Covid-19 over the last 24 months, it is more important than ever to undertake a detailed review of the current year and plan for the year ahead.
It is crucial that year-end tax planning reviews are undertaken as soon as possible, as you will need time to consider all options available, as many of the allowances and reliefs cannot be applied retrospectively after 5 April 2022.
If you require advice or guidance on tax planning as we reach the end of the tax year or indeed for the year ahead, please do not hesitate to contact us.
The summary below outlines some of the tax issues that you should now be considering, to ensure you utilise the maximum tax savings as possible and all reliefs and allowances available are being fully utilised.
PERSONAL TAX
Personal allowance
The first £12,570 of a taxpayer’s income is generally tax free by virtue of the personal allowance. It is important for individual taxpayers to make use of the personal allowance each tax year because it cannot be carried forward.
Non-domiciled individuals claiming the remittance basis are not entitled to a personal allowance.
Inter-spouse transfers
Maximise Capital Gains and Income Tax rates and allowances through these exempt transfers. For individuals whose annual income is between £100,001 and £125,140 this is an ideal way of reducing your tax liabilities.
Savings Nil rate Band
For basic rate taxpayers, there is a savings nil rate band of £1,000, for higher rate taxpayers, the savings rate band is £500, and for additional rate taxpayers it is withdrawn altogether. The savings nil rate band is not transferable between spouses, so it is important to ensure that bank accounts are held to maximise the nil rate band. To make use of your spouse’s Savings Nil Rate Band you could do this by electing to transfer savings held in your own name to your spouse.
Exchange your salary for benefits
Consider exchanging part of your salary for payments into an approved share scheme or additional pension contributions, to take you below the £100,000 threshold.
Gifts to Charities
Charitable donations made under the Gift Aid scheme can result in significant benefits for both the donor and the charity. It is important to keep a record of any charitable payments on which you wish to claim tax relief, as HMRC may request evidence.
For example, if you are a higher rate taxpayer and you make an £80 donation to a charity, the gross value of the gift to the charity is £100, since it can claim back the basic rate tax of £20. You can claim an additional 20% tax relief on the gross value, reducing the net cost to £60.
For a donation to qualify for tax relief, the charity must be located in an EU member state (plus Iceland, Norway and Liechtenstein) and must be recognised as a qualifying charity by HMRC.
Capital Gains Tax
Endeavor to use your annual capital gains tax exemption. Use it or lose it. The first £12,300 of capital gains per are tax free.
Consider transferring assets between spouses or civil partners to enable use of combined allowances.
Consider “Bed and Spouse” or else “Bed and ISA” Consider delaying any further disposal into the next tax year, to use the future annual exemption, utilisation of lower rate tax bands, or simply delaying payment by a year. Claim any capital losses, even if an asset has not necessarily been sold (i.e. it has become of negligible value). Consider whether the loss can be carried back. Ensure any losses that are carried forward are correctly recorded.”
Private Residential Relief and Lettings Relief were considerably reduced in April 2020. Notwithstanding this, it is important to make sure, where eligible, that you take full advantage of these reliefs.
Private Residence Relief (PRR) currently allows an additional grace period of the last nine months of ownership. Lettings Relief is now limited and is available if you share your home with a tenant or have moved into care. If your property has increased in value since purchase, this can still have a significant impact on your capital gains tax bill.
Non-residents are not generally subject to UK CGT. There is an exception to this rule, however, for disposals of UK immoveable property, and certain indirect interests in UK immoveable property.
Non-domiciled individuals claiming the remittance basis of taxation should take professional advice, as the rules relating to remitted capital gains are complex. The annual exemption will not be available and it may not be possible to claim relief for overseas capital losses.
The timing of a disposal may affect the amount of CGT payable. For example, if you are a basic rate taxpayer in 2021-22 but expect to be a higher rate taxpayer in 2022-23, realising a disposal in 2021-22 so that some or all of the resulting gain falls within the basic rate band will reduce the amount of CGT payable (albeit with a one-year acceleration of the tax).
For disposals that complete on or after 27 October 2021, the deadline to report the disposal and pay any tax due to HMRC was extended from 30 to 60 days.
With potential changes to Capital Gains Tax expected it is important to seek advice should you have disposed of property in the current tax year or are expected to do so in the future.
Dividends and bonuses
Have you considered paying these early, so that they fall into the current tax year? Equally, for individuals who receive relatively low levels of taxable dividend income, it might be worth deferring dividends.
Inheritance tax
Individuals who are domiciled (or deemed domiciled) in the UK are subject to IHT on their worldwide assets. Non-domiciled individuals (non-doms) are normally subject to IHT on their UK assets only.
Ensure you use your maximum gift allowances and claim all the relief available. As a general guide, it is key to make sure that you have a tax efficient Will in place and that you consider taking appropriate life assurance cover to help protect your family financially.
An IHT annual exemption Gifts of up to £3,000 per year can be made on an IHT free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used. A married couple can therefore make IHT exempt gifts totaling £12,000 per tax year. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death. You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts. Please see below for further details.
BUSINESS TAX
Dividend taxation
Have you utilised the zero per cent Dividend Tax Band of £2,000? Try and make use of the dividend nil rate band where possible and consider declaring a dividend where the taxpayer is a shareholder in a family company and not fully utilising the basic rate tax band for the current tax year.
Where there is a family company, dividends may represent a tax-efficient means of extracting profits by adult family members. Dividends are taxed at lower rates than employment income and do not attract NICs. However, dividends are not tax deductible for corporation tax purposes. It should also be noted, from 6 April 2022 the rates of income tax applicable to dividend income will increase by 1.25%. The dividend ordinary rate will be 8.75%, the dividend upper rate will be 33.75% and the dividend additional rate and the dividend trust rate will be 39.35%. The dividend trust rate will also increase to 39.35%. These changes will apply UK-wide.
If you are a shareholder director, excess profits may be paid out as a dividend or a bonus. Bonuses are taxed at your marginal rate of tax, and will attract both employee and employer NICs, which will also increase from 6 April 2022 as part of the new Health and Social Care Levy, mentioned here. However, these will be deductible for corporation tax purposes.
Salaries
Consider payment of salaries to owner managers at tax efficient levels following the reduction of the Dividend Tax Band. The personal allowance for income tax this year is £12,570, which cannot be carried forward, so it is important to try and use this. There may be a benefit of ensuring a salary is paid of at least the lower earnings limit National Insurance threshold of £6,240, to ensure that credit is obtained for the year’s contributions towards the state retirement pension. Furthermore, drawing a salary of up to £9,568 can maximise the use of personal allowances and reduce corporation tax, without payment of class 1 National Insurance contributions.
Property Investment Businesses
For residential buy-to-let investors, mortgage interest is now only eligible for income tax relief at the basic rate of 20%, regardless of tax bracket. As this has reduced from previous tax years, this may have increased taxable income, increasing certain thresholds, which could reduce eligibility for child benefit, personal allowance or pension savings annual allowance, and push some taxpayers into a higher tax band. For these reasons, it may benefit to consider the merits of setting up a limited company for buy-to-let properties that you hold personally.
Non-resident individuals and trusts who let out UK property are subject to UK income tax on any profits, and have ongoing tax compliance obligations in the UK.
Letting agents (and tenants, where there is no agent and where rents exceed £100 per week) are required to deduct basic rate tax (currently 20%) from the gross rental income before it is paid to the landlord. Credit for the tax deducted is then given when the tax return is prepared.
A non-resident landlord can apply to HMRC for approval to receive rental income with no tax deducted. If a property is jointly owned, each joint owner will need to apply.
Non-resident companies renting out UK property are now taxed under the corporation tax regime and must calculate their profits in line with corporation tax principles, and file corporation tax returns. These companies are subject to a rate of 19% on their profits.
Corporation tax
Currently 19 per cent, this was set to reduce to 17 per cent from April 2020 but will now remain the same. The changes to dividend taxation and corporation tax rates mean you may wish to take advice to check how this impacts on you and your business.
Finance Act 2021 introduced generous innovation incentives to encourage capital investment by businesses
during 2021 and 2022. An extended three year trade loss carry back, will generate for many companies, an immediate corporation tax repayment. Accompanying these reliefs is an increase from 19% to 25% in the main rate of corporation tax, but not until 1 April 2023. A small profits rate of 19% for companies with profits not exceeding GBP 50,000 will take effect from the same date
Capital Gains
Have you used your annual exemption for 2021-22 of £12,300?
Business Asset Disposal Relief
Business Asset Disposal Relief (BADR) was previously known as Entrepreneurs’ Relief. It reduces the rate of CGT to 10% on qualifying business gains, up to a lifetime limit of £1 million per person.
The relief applies to a disposal of shares in a trading company provided that, during the period of two years immediately prior to the disposal, you:
· Own at least 5% of the ordinary share capital;
· Are able to exercise at least 5% of the voting rights;
· Are beneficially entitled to at least 5% of the profits available for distribution or 5% of the
distributable assets on winding up, or, on a sale of the company, would receive at least
5% of the consideration as a result of holding the shares; and
· Are an officer or employee of the company.
The relief can also apply to the disposal of a business or part of a business, and certain assets used in a business, although restrictions may apply if:
· There is personal use of a business asset;
· The asset was used in the business for only part of its ownership period;
· You were not involved in the business throughout the ownership period; or
· The asset has been rented to the business.
A separate relief, Investors’ Relief, is similar to BADR, but allows external investors to claim tax relief on their investment in qualifying shares of unlisted trading companies.
Accounting dates
Have you considered changing your accounting dates, and taking advantage of the tax benefits of overlap relief or incorporation?
Incorporation
If you are trading as a sole trader, partnership or Limited Liability Partnership should you consider incorporation to a Limited Company as a more tax efficient business structure?
Capital Allowances
Capital allowances can be claimed on expenditure on certain types of assets used in your business.
The Annual Investment Allowance (AIA) is a particularly valuable relief for businesses. 100% relief is given for expenditure on most types of plant and machinery and many fixtures in buildings, up to a limit of £1 million (until 31 March 2023).
Any other expenditure eligible for capital allowances generally attracts an annual capital allowance of 18% or 6% (depending on the nature of the expenditure) on a reducing balance basis. A new ‘super-deduction’ allows companies within the charge to corporation tax to claim 130% relief on the acquisition of new plant and machinery. It applies to acquisitions made in the two-year period that began on 1 April 2021.
Research & Development tax credits
Have you claimed for all your eligible R&D projects to take advantage of the significant benefits available? HMRC will allow an extra 130 per cent of identified costs to be written off against taxable profits – this equates to 33p in every pound spent on projects that have led to the creation new products, processes or services or modifying an existing product, process or service. Claims can even be made against innovations that resulted in a loss.
Making Tax Digital for Business: VAT
HMRC is phasing in its landmark Making Tax Digital (MTD) regime, which will ultimately require taxpayers to move to a fully digital tax system, beginning with MTD for VAT. Since 2019, businesses with a turnover above the VAT threshold (currently £85,000) have been required to keep digital records for VAT purposes and provide their VAT return information to HMRC using MTD functional compatible software. HMRC has recently opened a pilot service Making Tax Digital for Income Tax for self-employed businesses and landlords with straightforward affairs (i.e. those who will need to use the service from April) and the pilot scheme will be gradually extended for other businesses. Keeping digital records and making quarterly updates will not be mandatory for taxes other than VAT before April 2022.
INHERITANCE TAX
Switch your assets
Individuals who are domiciled (or deemed domiciled) in the UK are subject to IHT on their worldwide assets. Non-domiciled individuals (non-doms) are normally subject to IHT on their UK assets only.
Inheritance Tax (IHT) must be paid on the value of any estate above £325,000. However certain assets including business and agricultural as well as shares in private trading companies may qualify for 100 per cent relief from IHT. The Resident Nil Rate Band (RNRB) was introduced in 2017 and applies to a residence passed, on death, to a direct descendant. It is being introduced in stages – £150,000 initially, rising to £175,000 (2020). From April 2020 there is a nil rate band of £325,000 plus RNRB of £175,000, – which, in total, provides an IHT allowance of £500,000 per person, so a married couple could have a £1 million allowance. Estates worth over £2 million will start to lose the RNRB, with it being withdrawn at a rate of £1 for every £2 over £2 million.
Charitable and personal gifts
If you leave at least 10 per cent of your net estate to charity a reduced rate of 36 per cent rather than 40 per cent applies and could save your family money. Gifts to a spouse can be made now to use up his or her nil rate band and could help you to reduce the value of the part of your estate above the £325,000 band. Other gifts may be free of IHT but it is important to seek advice first.
Passing on your pension
Following the change to pension rules in 2015, if you have not already done so, you should revisit your current plans and update your Will to ensure that your family receives the full benefit of any remaining pension fund when you die.
Trust funds
There are many ways that a formal trust fund can protect and maximise your family’s future assets. There have been a number of changes to the treatment of trust funds recently which are complex and could affect some people. If you are considering setting up a Trust, seek advice.
PENSIONS
Protecting a large pension
The Lifetime Allowance (LTA) reduced from £1.5 million to £1.25 million in 2014. The LTA has since been reduced further and was £1,055,000 for 2019/20, rising to £1,073,100 from 2020/21. If this is likely to affect you, we urge you to take advice as there are ways of protecting your funds.
Consider making additional contributions to your pension scheme before the end of the tax year to obtain relief at 40% or 45%, depending on whether you are a higher rate or additional rate taxpayer, taking care not to breach your available annual allowance or the lifetime allowance. Contributions may be of particular benefit where your income is just above one of the income tax thresholds, or between £100,000 and £125,000 (tax relief is available at 60% on income falling within this bracket).
Stakeholder pensions
All UK residents including children can make annual net contributions of £2,880 per year (£3,600 gross) regardless of whether they have any earnings. There are ways of using these payments to keep below the £50,000 income threshold to retain child benefit. It is also a very beneficial way of giving your children a helping hand for the future. If pension investments were to grow at a rate of nine per cent every year, investing £2,880 a year for your 10 year old child could result in a maximum pension pot of £1 million by the time he or she is 68 years old.
Pension drawdown
If you are 55 or over, you may be able to start drawing down pension benefits now from a personal pension such as a SIPP, even if you are still working. You may take up to 25 per cent tax-free with the rest taxed at your marginal rate. Anyone who is entitled to flexible drawdown and who is considering retiring overseas should seek advice on potential additional tax savings available to them.
Annual pension allowance
Have you used your full pension allowance? You can invest up to £40,000 a year into a pension tax-free. This amount can be carried over three years, allowing you to use unused allowance to top up your pension.
Carry forward benefits
Have you claimed your higher or additional tax relief? Have you used the carry forward rules in order to benefit from any unused allowance from the previous three tax years?
Make tax-free pension contributions
Pension contributions made to employees by an employer are tax efficient. If you own the company you can claim a business tax reduction. Where employees exchange some of their salary in return for a larger pension contribution made by the employer both parties can save on national insurance contributions.
Efficiency
Pensions remain an efficient planning tool for tax and as an investment tool, but specialist advice is essential. An innocent oversight can cause a raft of unwanted tax, and other issues.
RETIREMENT
Retirement planning
Have you ensured that you have a suitable plan in place to meet your needs in retirement? There are many tax reliefs and investment opportunities available that can increase your income and savings in retirement.
RESIDENCE
Residence
An individual’s residence status for UK tax purposes is determined in accordance with the Statutory Residence Test (SRT). Whilst this provides certainty on residence status, the rules are complex.
There are three main parts to the test, which need to be applied in the following order:
· Automatic overseas tests (ie the automatic tests for non-residence).
· Automatic UK tests (ie the automatic tests for UK residence).
· Sufficient ties tests (ie ongoing ties to the UK).
· The first two tests are based on day count, employment status (abroad or in the UK) and where you have your only or main home. The third test (the sufficient ties test) determines your residence status by looking at a combination of physical presence and the number of connections (ties) you have with the UK, such as whether your family lives in the UK or whether you have accommodation in the UK.
You are considered to have spent a day in the UK if present at the end of the day. This is subject to special rules for individuals who may be deemed to be in the UK, are in transit, or whose presence is due to certain exceptional circumstances.
You should seek professional advice on your residency position: the rules are complex, and it is important to ensure that your particular circumstances are taken into account.
If you are non-resident with UK source income, UK tax may be due. This will depend on the nature and amount of the income. Again, we recommend taking professional advice.
NON UK- DOMICILIARIES
Non UK Domiciliaries
If you consider yourself a non-UK domiciliary, ensure you have discussed with your tax advisor, and you have as much ammunition as possible, to defend your non-domiciliary status in the event of a query from HMRC.
Non-domiciled individuals are deemed domiciled in the UK for income tax, CGT and IHT purposes once UK resident in at least 15 out of the immediately preceding 20 tax years. Those non-domiciled individuals born in the UK with a UK domicile of origin will be deemed domiciled at the point at which they become UK resident.
Once deemed domiciled, individuals are taxed on their worldwide income and capital gains on an arising basis. They cannot access the remittance basis of taxation (see below). Some important protections are available for trusts set up before an individual becomes deemed domiciled. These cannot apply to those non-domiciled individuals born in the UK with a UK domicile of origin.
THE REMITTANCE BASIS
UK resident Non-domiciled individuals who are not deemed domiciled can choose, from one year to the next, whether to be taxed on worldwide income and gains as they arise (the arising basis) or to claim the remittance basis of taxation.
If you elect to be taxed on the remittance basis, you will only pay tax on your overseas income and
overseas capital gains to the extent that the funds are brought into or used in the UK. You will usually lose your personal allowance and the CGT annual exemption when accessing the remittance basis.
To take advantage of the remittance basis, certain longer-term residents in the UK must pay an annual
Remittance Basis Charge (RBC). With the advent of deemed domicile status there are now two levels of RBC, depending on the length of time you have been UK resident:
· £30,000 if you have been tax resident in the UK for at least 7 out of the previous 9 UK tax years; or
· £60,000 if you have been tax resident in the UK for at least 12 out of the previous 14 UK tax years.
TRANSPARENCY AND INFORMATION EXCHANGE
Transparency and information exchange
In response to increased international tax information exchange and transparency initiatives, the UK introduced Failure to Correct (FTC) penalties for taxpayers who have failed to disclose any undeclared offshore tax liabilities relating to relevant periods. The standard penalty is equivalent to 200% of the tax liability that should have been disclosed under the RTC (Requirement to Correct). In serious cases, an additional penalty of up to 10% of the value of the assets connected to the failure can be charged, and taxpayers can be ‘named and shamed’.
INVESTMENTS
ISAs
Have you used your maximum annual investment of £20,000? It is important for individual taxpayers to make use of the ISA allowance each tax year because it cannot be carried forward.
Every UK resident individual over the age of 18 can invest up to £20,000 in a new ISA in 2021-22. Investments can be in a cash ISA and/or a stocks and shares ISA in any combination of amounts, provided that the overall annual limit is not exceeded. Any part of the annual investment limit unused during the tax year is lost.
Income and gains arising within an ISA are free of income tax and CGT.
When an individual dies, their surviving spouse or civil partner benefits from an allowance up to the value of the deceased’s ISA savings at the date of their death. This is in addition to the surviving partner’s own normal annual subscription limit.
Junior ISAs are available for all UK resident children under 18 years of age who do not already have a Child Trust Fund. Up to £9,000 can be invested in 2021-22 on behalf of a child (by parents, grandparents or other relatives or friends) in cash, stocks or shares. No withdrawals are permitted until the child reaches 18, when they can roll the Junior ISA into an adult ISA or take the cash.
In addition to any existing Junior ISA they may already have, 16 and 17-year-olds can open a cash ISA and invest up to £20,000 in it for 2021-22.
A Lifetime ISA is available to those aged between 18 and 40. Individuals can save up to £4,000 each year, and will receive a government bonus of 25%. Restrictions apply: contributions can only be made until they are 50, and withdrawals before they turn 60 are subject to a 25% charge, unless they are made to fund the purchase of a first home.
Tidying-up your investments
Have you realised investments and bond gains or closed deposit accounts where funds may be attracting negligible rates of interest?
Take advantage of share schemes
If your company offers a share scheme, such as a share incentive plan (SIP) or a sharesave (SAYE) there are usually price discounts and tax incentives for taking part.
Venture Capital Schemes
The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) all offer significant income tax and CGT advantages. Investors’ Relief also offers potential reductions in CGT. You should seek advice to ensure that the relevant conditions are satisfied by both you and the company to secure relief on your investment. HMRC offers an advance clearance procedure to provide comfort that the qualifying conditions relating to the company’s structure, its activities and the mechanics of the share subscription are met.
Individuals can invest up to £2 million annually in EIS companies, provided that any amounts over £1 million are invested in qualifying ‘knowledge intensive’ companies. However, there are restrictions on investments qualifying for EIS relief where there is no real risk to the capital being invested.
It is also important to remember that EIS, SEIS and VCT investments are generally high risk and may be difficult to sell. You should always consider seeking your own independent investment advice before making such an investment.
EIS investment
Have you considered these investments, which offer income tax relief of 30 per cent, as well as possible capital gains tax deferral?
Venture Capital Trust investment
Have you considered VCTs, which provide ‘front end’ income tax relief on subscriptions of up to £200,000, as well as tax-free dividends and capital gains tax reliefs?
VCTs are quoted investment trusts that invest in a range of relatively small trading companies. You can obtain income tax relief of 30% by subscribing up to £200,000 for shares in VCTs in 2021-22. Gains are generally exempt from CGT after five years of ownership.
Seed Enterprise Investment Schemes
Although investing in an SEIS can carry more risk than an EIS or VCT, there is substantial tax relief available to offset a large part of potential losses
Community investments
Share purchases or loans to a Community Development Finance Institution (CDFI) qualify for tax relief. Over a period of 5 years relief is provided at a five per cent, providing 25 per cent relief in total.
Social Enterprise investments
Investing in certain ‘social impact’ organisations can attract social investment tax relief (SITR) of 30 per cent. The limits have been changed this year. The amount of qualifying investment a qualifying social enterprise can raise has, in most cases, increased to a maximum of £1.5 million over its lifetime.
Life Assurance bonds
Insurance backed bonds allow five per cent of the original capital to be withdrawn each year tax-free. Although you need to consider commissions, management costs and basic rate tax charges within the bond, the five per cent
tax-free withdrawal is still attractive to anyone whose level of income means they will lose their personal allowance and pay 45 per cent income tax.
Offshore bonds
As with UK bonds, five per cent of the original capital invested can be withdrawn each year tax-free. Although they are taxed in full when disposed of they provide a useful way of deferring tax.
Investor’s Relief
Investors’ Relief applies a reduced 10% rate of CGT on up to £10 million of qualifying gains on shares in unlisted trading groups. Amongst other conditions, the shares must be held for at least three years.
TAX PLANNING RECOMMENDATION
Recommendation
Tax planning can be complex. We would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively.
We hope that you find this guide/checklist useful, but please bear in mind that this only provides a summary of the options you should be considering and not all options will be suitable for everyone.
This guide is for general information only and does not substitute specific advice. You should not rely on it as specific advice and Peria & Co cannot accept any liability for its contents. If you need guidance please contact us at info@peria.co.uk or call us on +44 (0)1932 849023.
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