It may still be a few months before the end of the current tax year but now is the time to start thinking about the financial steps you should take before 6 April 2020.
If you’re a high earner, here are five things that you should think about doing in the New Year.
- Make your Inheritance Tax gifts – normal expenditure from surplus income
One of the most valuable Inheritance Tax exemptions is the exemption for ‘normal expenditure from surplus income’. To apply, any gift you make must:
- Be made from income (IHTM14250); and
- Be part of your normal expenditure (IHTM14241); and
- Leave you with sufficient income to maintain your normal standard of living (IHTM14251).
One of the key requirements of making gifts in this way is that they are regular, both in terms of frequency and value. The definition of regular is itself subjective, but similarity in terms of frequency and value helps argue that you satisfy the requirements of this exemption and are not instead making what could be deemed to be potentially exempt transfers.
Keeping accurate records of gifts made under this exemption is also critical. So, it’s vital that you work with your financial planner to ensure that gifts are made regularly and are from income. Your adviser can also help you to record these gifts carefully to evidence to HMRC that they were made from normal expenditure and that they did not adversely affect your standard of living. The next two ideas to think about can use some of these gifted funds should you want them to be invested directly.
- Maximise the family’s ISA contributions
Using a Cash or a Stocks and Shares ISA (or a combination of the two) you can save or invest up to £20,000 a year tax-free.
If you are in a position to do so, it can make sense for you and your spouse to take advantage of each other’s ISA allowance, particularly if one of you has more financial resources than the other. That way, you can save (in the case of Cash ISAs) or invest (in the case of Stocks and Shares ISAs) up to £40,000 in 2019/20.
Don’t forget also that your children have an ISA allowance. You can pay up to £4,368 (in the 2019/20 tax year) into a Junior ISA for a child under the age of 18.
And, if your son or daughter is aged 16 or 17, you can also contribute to an adult ISA in their name, meaning you can save/invest £24,368 in your child’s name tax-free before 6 April 2020.
- Maximise your child and grandchild’s pension contributions
You have probably already maximised your pension contributions this tax year, but don’t forget that you can also pay into pensions for your children and grandchildren before April. For those of you that have spare cash, putting money into your children’s pension will boost their retirement prospects (topped up by tax relief) and could also earn your children a tax refund (if they are higher or additional rate taxpayers) and could also reduce the hit they face if they are a higher earner receiving child benefit.A little-known feature of the pensions system is that the contribution by the parent is treated as if it had been made by the recipient.So, for example, if you as a parent pay £800 into your child’s personal pension, the recipient will get basic rate tax relief on the contribution, taking the amount in the pot up to £1,000. In addition, there are two further benefits to the recipient:
- If your child is a higher-rate taxpayer, he or she can claimhigher-rate relief on the contribution made by you as the parent; this would be done through the annual tax return process and would reduce the tax bill of the recipient;
- If your child is affected by the ‘high income child benefit charge’ as a parent themselves, and is earning in the £50,000-£60,000 bracket (or slightly above), the money contributed by you as their parent is deducted from their income before the high income child benefit charge is worked out, thereby reducing their tax charge; for example, if the recipient is earning £60,000 and therefore faces a child benefit tax charge of 100% of their child benefit amount, a pension contribution by the parent of £8,000 (grossed up to £10,000 by tax relief) would reduce the recipient’s income to £50,000 for purposes of the child benefit charge and would completely eliminate the tax charge giving them entitlement to child benefit payments from the government to assist your grandchildren;
Apart from generally wanting to help your children, you may be interested in this idea particularly because:
- a) You are up against your own annual limits for pension contributions and may therefore have spare cash;
- b) Contributions may reduce future Inheritance Tax bills if you qualify for one of the standard exemptions such as normal expenditure from surplus income;
The amount that you can contribute with the benefit of pension tax relief for them is not limited by your pension tax relief limit but by the limit that your children face – which in many cases will be up to their annual salary or £40,000, whichever is the lower.
- Take company dividends
Any dividends should be issued and paid by your company by 5 April 2020 to be included in your personal Self-Assessment for the 2019/20 tax year.
This is important as it will help you to ensure you are maximising tax efficiency by using your personal tax-free allowances and HMRC tax thresholds.
As a company director with a salary of £8,632 (set at the 2019/20 National Insurance Primary threshold), you can take up to £3,868 in tax-free dividends by using your remaining, unused, Personal Tax Allowance of £3,868 (£12,500 personal allowance – £8,632 salary).
You can then take the next £2,000 in dividends tax-free using your Tax-Free Dividend Allowance.
The next £35,500 in dividends is taxed at the basic dividend rate of 7.5%. Any dividends above this are taxed at 32.5% up to £150,000 and then at 38.1% above £150,000.
This means that, in the 2019/20 tax year, you could take £8,632 as salary and £41,368 as dividends without paying any higher rate tax. If you have other sources of income or benefits in kind (such as rental income, external dividends, a company car, or other employment or sole trader income) this will mean more tax will be due, as the basic and higher rate thresholds will be used more quickly.
- Use annual Capital Gains Tax allowance
Adults and children each have a capital gains tax allowance of £12,000 under which assets having a capital gain within them can be disposed of within the tax year with the first £12,000 being exempt from tax.
Capital gains allowances cannot be carried forward so if possible it makes sense to utilise these every year.
- On the horizon – changes to the timing of Capital Gains Tax (CGT) payment on property
Whilst not something you should “do” before the tax year end per se, we wanted to make our clients, that are putting a second property on the market, aware of some impending changes.
Under the current system, disposals of residential property by UK resident individuals that do not benefit from the Principal Private Residence exemption are included on an individual’s Self-Assessment tax return for the year of disposal. Consequently, the CGT due becomes payable on 31 January following the end of the tax year in which the disposal is made.
So, for example, if you had sold a property on 1 August 2019, the gain would be shown on your 2019/20 Self- Assessment tax return and the CGT due would be payable on 31 January 2021.
New rules that come into force in the 2020/21 tax year mean you will be now required to make a return within 30 days of the date of disposal (bearing in mind that no returns are required for no gain/no loss disposals and for disposals where no tax is due.)
Any tax payable will be due on the date that the return is due; that is, 30 days after the completion date. The effect of this change is to dramatically shorten the period between selling a property and paying the tax. As a comparison:
- A sale on 1 April 2020 – tax payable 31 January 2021
- A sale on 1 May 2020 – tax payable 31 May 2020
So, from a cash flow perspective, you may be better off selling sooner rather than later (assuming that you have not already used up CGT allowances in the 2019/20 tax year).
The gain will then also need to be shown on your Self- Assessment tax return in the usual way. The total CGT payable for the tax year will be computed considering all gains and losses in the year and credit will be given for any CGT you have already paid.
Remember that a disposal for CGT purposes includes gifts where there is no consideration, so these provisions will apply equally to both transfers to family members and actual sales.
Get in touch
If you want to maximise your tax allowances and/or pension contributions before the end of the tax year, get in touch. Contact your adviser or send us a message via hfmcwealth.com or call us on 020 7400 4700.