In this article, we have summarised some of the principal financial planning issues to consider both in the run up to the end of the current tax year and the start of the new one. This year the last working day of the tax year is 5th April itself, which falls on a Thursday. There is no Spring Budget this year but the government will publish its Spring Statement on Tuesday 13th March – however this is supposed to just consist of a response to the OBR’s revised forecast and some longer term thinking ahead of the Autumn Budget rather than being a major fiscal event.
Pensions
Carry Forward
If an individual exceeds the standard Annual Allowance (AA) or their tapered annual allowance if applicable, it is possible, if eligible, to look back and consider whether there is any unused AA in the 3 previous tax years (up to £40,000 in each of 2014/15, 2015/16 and 2016/17). As long as an individual has been a member of a registered pension scheme at some point in each year being carried forward from, it doesn’t matter whether they actually made any pension contributions in that tax year. Also, the person does not have to make contributions to the pension arrangement that they have been a member of in order to utilise carry forward – they can make contributions to a different pension arrangement. The ability to carry forward from 2014/15 will be lost after 5th April 2018..
Annual allowance
Those who have exceeded their annual allowance (which includes any carry forward they are eligible to use) for 2016/2017 must have declared this on their Self Assessment tax return (the deadline for submitting this was 31st January 2018). They would also have to pay a tax charge, either personally or via ‘scheme pays’ (either way it must be declared on the tax return).
Money purchase annual allowance (MPAA)
Anyone subject to the MPAA for 2017/18 has a £4,000 annual allowance for money purchase contributions and this must be used by 5th April or it will be lost as unused MPAA can’t be carried forward.
Tapered annual allowance
It may only be possible in some cases to assess the total level of income for the tax year and hence the level of the annual allowance close to the tax year end. If these figures can be accurately assessed in time to make a pension contribution before the tax year end all well and good. Otherwise, as soon as accurate figures are available, any shortfall can potentially be made good using carry forward.
Lifetime allowance
We haven’t been able to say these words in a while – the lifetime allowance will increase on 6th April 2018 to £1,030,000, in line with the CPI increase. For anyone subject to the standard lifetime allowance and whose pension benefits have the potential to exceed the LTA, it may make sense to postpone any Benefit Crystallisation Events (BCEs) until the new tax year in order to use up a slightly smaller percentage of lifetime allowance, avoid an LTA charge and/or achieve a slightly higher tax-free cash figure.
Auto enrolment
The earnings trigger remains at £10,000 for 2018/19. The qualifying earnings band for 2018/19 is £6,032 – £46,350.
Minimum contribution rates increase from April 2018 and again in April 2019.
State pension
The rates for the full single tier state pension have been confirmed for 2018/19 as £164.35pw (£4.80 increase) and the basic state pension will increase under the triple lock guarantee by 3% to £125.97pw.
Planning using pension contributions
Consider whether there is any scope to make further contributions this tax year (and next) in order to reduce income so that:
- income falls into a lower tax band
- the Personal Allowance remains available (ie. reduce adjusted net income to £100k or less to keep the full personal allowance or to below the age allowance limit in order to avoid the age-related personal allowance being reduced)
- entitlement to Child Benefit remains fully or partially available
- If the income influencing the child benefit charge can be brought down to £50k pa or less then a full entitlement to child benefit is reinstated (ie. no charge will apply) and any reduction in income between £50k and £60k will reduce the charge payable
- the main methods for reducing income are via the making of pension contributions and the use of salary sacrifice However, bear in mind that maximising contributions as soon as we hit the new tax year may not be the best course of action and a greater benefit might be obtained by staggering or postponing pension contributions, eg:
- Those with income over £100k might consider staggering their pension contributions in order to bring income below £100k over a number of tax years in order to avoid the loss of the Personal Allowance (which means an effective tax rate of 60% on affected income)
- Those with income over £50k (and especially £60k) again might consider staggering pension contributions over a number of tax years in order to avoid the effective loss (or reduction) in Child Benefit via the Child Benefit Charge
Income tax
With effect from 6th April 2018, there will be an increase in the standard personal allowance to £11,850* (which is no longer affected by age). The income limit of £28,900 is now only relevant to married couple’s allowance (available where one of the couple was born before 6th April 1935). The income tax bands for 2018/19 (and 2017/18 for comparison) for England, Wales and N. Ireland are shown below. The proposed bands and rates for Scotland are available on request, although these are subject to change.
For Tax Year 2017/18
Staring Rate for Savings (0%)** - £0 - £5,000
Basic Rate: 20% - £0 - £33,500
Higher Rate: 40% - £33,500 - £150,000
Additional Rate: 45% - Over £150,000
For Tax Year 2018/19
Staring Rate for Savings (0%)** - £0 - £5,000
Basic Rate: 20% - £0 - £34,500
Higher Rate: 40% - £34,500 - £150,000
Additional Rate: 45% - Over £150,000
* personal allowance is reduced once adjusted net income exceeds £100,000 and will reduce to zero in 2018/19 where adjusted net income is £123,700 or more
**not available if non-savings income (eg. salary, pension income) exceeds £16,850 in 2018/19 (ie. the personal allowance plus the starting rate band)
Therefore in 2018/19, higher rate tax kicks in once income exceeds £46,350 assuming the full personal allowance applies.
Effective income tax planning is very important and some of the main areas to consider are summarised below.
Independent taxation
That is, ensuring assets/income are split (where possible) between married couples and civil partners (and other couples where appropriate) in the most tax effective way to enable maximum use of personal allowances/reduce or eliminate Child Benefit Charge and possibly to move income into a lower tax band (e.g. if one party pays tax at a lower rate than the other). Where assets are transferred, these should be outright and unconditional gifts to ensure HMRC view that there has been a genuine change of beneficial ownership as well as legal ownership.
Investments could be transferred to a spouse/civil partner on a no gain/no loss basis without triggering a CGT disposal (subject to practical considerations and ensuring such transfers are outright and unconditional).
Marriage allowance
Allows 10% of the personal allowance to be given by one spouse/civil partner to the other where the giver is a non-taxpayer and the receiver pays tax at no more than basic rate. The amount is £1,150 in 2017/18 and increases to £1,185 in 2018/19 (although some government sources state £1,190?). Once applied for, HMRC will continue to allocate 10% additional personal allowance to the receiving spouse (and 10% less to the other spouse) each tax year until told otherwise.
Dividend allowance
Reduces from £5,000 to £2,000 on 6th April.
Employers/business owners
Could consider paying salary/bonuses/dividends before 6th April 2018 to use up any unused personal allowances, basic rate band or dividend allowances (particularly as the dividend allowance reduces from £5,000 to £2,000 from 6th April 2018); and/or using one of the share option schemes available. Alternatively, the employer could consider postponing payments of bonuses/dividends etc until after 5th April 2018 if personal allowances, basic rate bands or dividend allowances have already been used up.
ISAs
Principal method of tax favoured investing with exemption from any personal income tax or CGT; ensure 2017/18 ISA allowance has been fully utilised (if appropriate) up to £20,000 (which can be fully invested in cash if required). On 6th April 2018 the new ISA year begins and a new annual subscription limit becomes available, again at £20,000. A cash ISA can be transferred to a stocks and shares ISA and vice versa these days. Eligible investors aged 16 or 17 can invest £20,000 into a cash ISA before 6th April 2018 and £20,000 in 2018/19.
Help-to-buy ISAs
Those with adult children who are planning to buy a home might consider gifting funds to their children so that they can invest in a help-to-buy ISA. This ISA is available to first time buyers over the age of 16. Savings of up to £200 per month and a one-off £1,000 at the start (forming part of the £20k overall ISA subscription limit) attract a 25% tax-free bonus from the Government, providing £3,000 cashback on a maximum saving of £12,000,
Lifetime ISAs (LISAs)
Between the ages of 18 and 40, it is now possible to open a Lifetime ISA. This ISA enables you to save up to £4,000 each year (forming part of the £20k overall ISA subscription limit) and receive a government bonus of 25% on any savings put in before your 50th birthday.
Single premium investment bonds (onshore and offshore)
Investment bonds can represent a useful tax planning tool. They are non income producing; the annual 5% cumulative allowance can enable tax to be deferred until a time when gains might be taxed at a lower level (or not at all); bonds (or segments) can be assigned to someone paying tax at a lower rate without causing an immediate chargeable event (as long as the assignment represents a genuine unconditional gift). Consideration should be given as to whether there is any tax advantage in carrying out bond encashments before 6th April 2018, or after (but remember that partial encashments are treated as occurring on the last day of the policy year whereas full encashments occur on the actual day of encashment). Offshore bond gains can be offset against the 0% starting rate band for savings if available and/or the Personal Savings Allowance.
Maximum Investment Plans
Although the maximum annual contribution to new qualifying policies is now £3,600 per person (with any excess being non-qualifying) including any qualifying policies taken out since 21st March 2012, within the £3,600 pa limit they may be suitable for higher/additional rate taxpayers looking to make regular savings over the longer term. Within the life fund, taxation is usually no higher than 20% overall and the policy proceeds after 10 years are generally tax free in the hands of the policyholder regardless of personal tax rate.
Enterprise Investment Scheme
£1,000,000 investment per tax year with 30% tax relief (or such amount as would reduce the investor’s income tax bill to zero). Unlimited CGT deferral also potentially available as long as the investment is made within the period 1 year before and 3 years after the disposal (the amount of the gain needs to be reinvested for full CGT deferral). An additional £1,000,000 investment is possible in tax year 2018/19 onwards if invested in ‘knowledge intensive’ companies.
Venture Capital Trust
£200,000 investment per tax year with 30% tax relief (or such amount as would reduce the investor’s income tax bill to zero). Tax free dividends and no CGT.
Seed Enterprise Investment Scheme (SEIS)
A version of the EIS applying to smaller companies carrying on a new business; 50% income tax relief on up to £100k per annum per investor, carry back available, as under EIS; exemption from CGT on gains on shares within the SEIS; and, provides for a complete exemption (not just a deferral) from CGT on half the gains realised from disposals of assets, where the gains are reinvested through the new SEIS in the same tax year.
EIS, VCT and SEIS schemes are high risk investments which are only suitable for a small minority of high net worth individuals. Investors may lose their capital.
Tax relief for residential landlords
The tax relief that landlords of residential properties get for finance costs is gradually being restricted. The restriction is being phased in gradually from 6th April 2017 and will be fully in place from 6th April 2020. Landlords can still deduct some of their finance costs when they work out their taxable property profits during the transitional period. These deductions will be gradually withdrawn and replaced with a basic rate relief tax reduction.
Tax Year 2017/18
Percentage of finance costs deductible from rental income – 75%
Percentage of Basic Rate Tax Reduction – 25%
Tax Year 2018/19
Percentage of finance costs deductible from rental income – 50%
Percentage of Basic Rate Tax Reduction – 50%
Tax Year 2019/20
Percentage of finance costs deductible from rental income – 25%
Percentage of Basic Rate Tax Reduction – 75%
Tax Year 2020/21
Percentage of finance costs deductible from rental income – 0%
Percentage of Basic Rate Tax Reduction – 100%
Capital gains tax
Consider realising gains (or losses to reduce gains to the level of the CGT annual exempt amount) before the tax year end in order to make use of the CGT annual exempt amount (£11,300 per person this year and a maximum of £5,650 for trustees – the figure for 2018/19 is £11,700 (£5,850 for most trusts – but shared between trusts where the settlor has created more than one trust subject to a minimum of £1,170 per trust).
Both husband and wife have their own CGT annual exempt amount so ensure assets are held in such a way as to maximise use of both allowances and make maximum use of the basic rate band (meaning gains are taxed at 10% instead of 20% (18% and 28% for taxable gains on residential property)). Assets can be transferred between spouses on a no-gain no-loss basis in order to make use of both exemptions/basic rate bands or to offset one spouse’s loss against the other’s gain (transfers must be outright and unconditional).
Growth investments: if investments such as growth unit trusts/OEICs are used and shared where possible between both members of a married couple/civil partnership then tax free ‘income’ can effectively be received by withdrawing gains within the annual CGT allowance.
The CGT allowance cannot be carried forward if unused in a tax year. If a substantial gain can be spread, consider realising some this tax year and next in order to make use of 2 sets of CGT allowances (or 4 if jointly owned with a spouse/civil partner). If a gain cannot be spread, consider deferring the disposal until the new tax year which will mean any CGT due will not be payable until 31st January 2020.
Although bed and breakfasting no longer works, there are alternatives to consider such as:
- Bed and ISA, e.g. sell shares and have them repurchased within an ISA
- Bed and SIPP, e.g. similar to above but with the benefit of tax relief on the contribution
- Bed and spouse – one spouse sells and the other buys back (although one cannot sell directly to the other – the two transactions must be separate)
- Sell one asset or fund and repurchase a very similar asset or fund
Inheritance tax
The IHT nil rate band remains at £325,000 in 2018/19 (and is frozen at that level until April 2021). This can present opportunities in terms of continued IHT planning using a variety of methods including insurance-based solutions if there is a need to retain access to capital and/or income (discounted gift trusts, loan trusts etc) as appropriate.
The main residence nil rate band (RNRB), introduced on 6th April 2017 at £100,000, increases to £125,000 on 6th April 2018 and continues to increase by £25,000 each year to reach £175,000 by April 2020. This can be used against the value of the main residence as long as the residence (or assets of equivalent value if the property is sold after 8th July 2015) is passed to direct descendants of the deceased (eg. children, grandchildren, their spouses). If not fully used, it is transferable between spouses in the same way as the standard nil rate band. It is reduced once the net estate value exceeds £2m.
Make maximum use of IHT gifting (where appropriate) before the tax year end and in the new tax year. The £3,000 annual exemption can be carried forward one tax year if unused as long as the donor fully uses the current year’s exemption first. Regular gifts out of surplus income can be established, perhaps by way of payment of premiums into a regular savings vehicle in trust. The £250 small gifts exemption can be made to an unlimited number of different people as long as no other gifts are made to the same people in the same tax year. All these exempt gifts are immediately outside the donor’s estate for IHT purposes.
Business assets qualifying for Business Property Relief (BPR) or Agricultural Property Relief (APR) could be gifted to a discretionary trust usually without an IHT liability arising which could be useful if, in future, BPR/APR is removed or reduced or, at a later date, the asset failed to qualify for BPR/APR.
If outright gifts are unsuitable due to the CGT bill that would arise, consider transferring the asset into a discretionary trust which would normally enable holdover relief to be claimed in respect of the CGT as long as the settlor, spouse and minor unmarried children cannot benefit (and if within the IHT nil rate band, there would be no IHT implications either).
Such planning must be carefully considered as it may be unsuitable if dealing with elderly or infirm clients where, on death, CGT would be eliminated. Gifting assets when their values are low can be advantageous although the CGT implications must be taken into consideration.
Investing for children
Although it is no longer possible for new Child Trust Funds (CTF) to be set up, it is still possible for payments to be made to existing CTF accounts. The maximum annual amount is £4,128 in 2017/18 and £4,260 in 2018/19. Accounts continue to benefit from tax free growth. The CTF was available to children born between 1st September 2002 and 2nd January 2011.
The Junior ISA is available to children under 18 who do not have a CTF account. The annual maximum subscription is the same as the CTF (£4,128 in 2017/18 and £4,260 in 2018/19) and funds grow in a tax-free environment. Transfers from CTFs to JISAs are allowable (since April 2015). The CTF must be closed and the funds transferred direct from the CTF provider to the JISA provider. This may offer a wider range of products.
Alternative planning methods for accruing funds for children would include establishing a bare trust for the child’s benefit and investing in either growth collectives to use the child’s own CGT allowance or an offshore single premium bond to offset chargeable gains against the child’s income tax personal allowance (exception – if the settlor is a parent and the child is a minor, chargeable event gains over £100pa would be taxed on the parent).
To retain more control a discretionary trust could be used, which may bring some income tax benefits as the first £1,000 pa of income (split between all trusts set up by same settlor subject to a £200 min per trust) falls within the trustees’ standard rate tax band and is taxed at basic rate (income above the band is taxed at 45%, or 38.1% for dividends). The trustees’ CGT exemption would be a maximum of £5,650 in 2017/18 and £5,850 in 2018/19.
Setting up and paying into a pension for the child, although access to funds will not be until age 55 as things currently stand (which could be classed as a good or bad thing!).
All of the above would represent gifts for IHT purposes and, depending on their nature, could be covered by the annual £3,000 exemption, the £250 small gifts exemption or the regular gifts out of income exemption.
In order to take advantage of bespoke Personalised Financial Advice relating to your own specific circumstances, aims and objectives, we will need to discuss either over the phone or in person. Please contact us to arrange an initial meeting/call and we will be delighted to help.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
The Financial Conduct Authority does not regulate Tax Planning or Trust Advice
