Having spent approaching £400 billion on propping up the UK economy over the last year, it is perhaps no surprise that the chancellor’s focus has turned to how to raise vital revenue for the Exchequer.
This year is set to see the nation’s tax burden hit a 50-year high. The ratio between taxes and the UK’s Gross Domestic Product (GDP) will hit its highest level since 1969, and with much of the tax burden falling on wealthier individuals and businesses, many could see their tax bill rise in the coming years.
While there was fevered speculation before the Budget that taxes would rise, it’s important to note that the chancellor’s tone has softened in recent weeks. In May, Sunak praised the UK’s “progressive” tax system and, for the first time, provided a level of comfort that tax increases are not imminent.
However, changes announced in the Budget will affect many and, of course, there could be further policy shifts in the coming years. To help mitigate tax, here are 10 strategies to potentially consider.
1. Cashflow planning
Modelling your financial future can identify potential tax issues before they arise. Whether it is projecting the value of your estate for Inheritance Tax purposes or determining how you draw an income in retirement in the most tax-efficient way, this cashflow planning plays a vital role.
Our sophisticated cashflow modelling tool enables us to model a range of “What if?” scenarios for clients that can help us devise strategies to help reduce tax liabilities.
ISAs are one of the simplest ways to maximise your tax-efficient savings. Each individual has a £20,000 ISA limit in the 2021/22 tax year, which you can split between Cash and Stocks and Shares ISAs.
Interest from Cash ISAs is paid tax free. Income from Stocks and Shares ISA is also tax free, nor is there any Capital Gains Tax (CGT) on profits realised on these investments.
Maximising your investment into ISAs for all members of the family can help grow your wealth tax-efficiently. Do not forget Junior ISAs – you can invest up to £9,000 in the 2021/22 tax year for anyone under the age of 18.
Pensions are one of the most tax-efficient ways to grow your wealth. Using your full Annual Allowance of £40,000 allows you to maximise the tax relief you receive on your contributions – up to 45% if you are an additional-rate taxpayer.
And if you pay the contributions through your business, you will reduce your National Insurance and Corporation Tax liabilities too.
You can then take up to 25% of your pension fund as a tax-free lump sum and, if you do not need the income from your fund, under current rules pensions can be an excellent way of passing wealth tax-efficiently to the next generation.
With the chancellor freezing the pension Lifetime Allowance at £1,073,100 until 2026, you could be affected if your total pension savings reach beyond this threshold. Talk to us for advice if you are in this position.
4. Structuring with a partner
Working together with your spouse or partner can offer significant tax benefits. These include:
- If you are married or in a civil partnership, transfers between you are exempt from Inheritance Tax. The surviving partner also inherits the other party’s nil-rate bands. So, assuming no lifetime gifts have been made that have used up the nil-rate band, assets totalling £1 million could pass to your children on the death of the surviving partner.
- The Capital Gains Tax exemption is per individual. Transferring assets between couples could help you use £24,600 of CGT exemption (2 x £12,300). And, if one of you pays higher Income Tax than the other, you could reduce the rate of CGT by transferring assets to the basic-rate or non-taxpayer.
- A review of income levels for those able to control their earnings can be a good idea in order to ensure you are not paying more higher- or additional-rate tax than necessary.
Remember that these strategies typically require you to be married or in a civil partnership and may not be available if you are unmarried.
5. Gifts to children
In simple terms, as long as you live more than seven years from when you make a gift, your children won’t have to pay Inheritance Tax (IHT) on that gift when you die.
Each individual can also give away £3,000 worth of assets each tax year and these will immediately fall outside the value of your estate. You can carry any unused £3,000 annual exemption forward to the next year – but only for one year.
6. Lifetime gifts
There is no Inheritance Tax (IHT) to pay on gifts between spouses or civil partners, so you can gift between you as much as you like during your lifetime, if they live in the UK permanently.
You can also reduce your IHT liability by making regular gifts from income. These must:
- Be made from income, not capital
- Be regular and habitual in nature
- Not adversely impact your standard of living.
Remember that it is important that you do not continue to “enjoy” any significant benefit from any asset that you gift during your lifetime. If you do, it may still be deemed to be within your estate and IHT will be due on it on your death.
Placing money, investments or property into a trust may help to mitigate a potential IHT liability, although, with some exceptions, you cannot benefit from these trust assets once this is done. If you do, the assets will typically be liable to IHT.
There are complicated tax rules around trusts, so always speak with a professional.
The Venture Capital Trust (VCT) sector raised £685 million for investment in small, innovative UK businesses in the 2020/21 tax year.
In 2021/22 you can invest up to £200,000 in VCTs and receive tax relief of up to £60,000. To benefit, you must have paid (or owe) as much tax during the tax year in which you invest and you must hold the investment for at least five years.
Most returns are paid through tax-free dividends. As an example, a tax-free dividend of 5% would be equivalent to a taxable dividend of 7.41% for a higher-rate taxpayer or 8.1% for an additional-rate taxpayer.
An Enterprise Investment Scheme (EIS) also offers tax benefits. You can claim back up to 30% of the value of your investment in the form of Income Tax relief, while you can also claim Loss Relief if the business fails, and there may be no CGT to pay on the shares when you sell them. They typically also benefit from Business Property Relief (BPR) and are deemed outside of your estate if you die owning them and having held them for more than two years.
These are typically higher-risk investments and will not be suitable for everyone, so taking professional advice is key.
9. Life Assurance
If you think there will be an IHT liability on your estate when you die, you could set up life assurance to cover the tax due, meaning that more of your wealth is passed to your beneficiaries.
It is important that any such policy is written in trust in order that the proceeds fall outside your estate for IHT purposes. The premium paid also reduces the value of your estate while you are alive, further reducing your IHT liability.
This can be a complicated area of estate planning and is best done with the help of a professional.
10. Family Investment Company (FIC)
An FIC is a private limited company with bespoke articles of association that is suitable to operate in a family estate planning context. The shareholders of the company will be family members and possibly a family trust.
Establishing an FIC can provide a structure for you to manage the investment of family wealth and the eventual transfer of its value to the next generation in a controlled way.
From a tax planning perspective, you can carefully control the timing and value of any gifts transferred and the tax treatment of doing so.