Tax year-end planning in 2015 is set to be rather different. A quick look at a few key dates in table one shows why. The brief gap between the Budget and the end of the Parliamentary session meant there was unlikely to be anything too controversial in Mr Osborne’s final Budget before the polls: there was simply not enough time to force legislation through. The corollary is that June could witness another Budget, as was the case in 2010.
This post-poll Budget will be when any tax increase medicine is dispensed, regardless of the complexion(s) of the new government. Thus in early spring, the tax year-end is only part of the planning story. The start of the new tax year needs to be considered – with a new set of annual exemptions – and the potential impact of a new government.
As well as last minute planning for 2014/15, now is also a good time to think about putting in place strategies to minimise tax throughout 2015/16, a number of which are relevant every tax year.
Before we proceed, please note that in this article all references to married couples include registered civil partners.
2014/15 saw a few changes to income tax with the total income trigger points for phasing out of the personal allowance (£100,000), child benefit tax (£50,000) and additional rate tax (£150,000) being unchanged.
Those affected could reduce their effect in 2014/15 and 2015/16 (assuming higher rate tax relief on pensions remains – see the pensions section later) by making a pension contribution. For example, if somebody has a total income of £110,000 in 2014/15 then making a pension contribution of up to £10,000 (before 3 April – allowing for Easter) could provide 40 per cent income tax relief and another 20 per cent effective relief through regained personal allowance.
Minimising the amount of tax payable can be combated in other ways including:
(i) Maximising use of a couple’s allowances, reliefs and exemptions
(ii) Using tax-efficient investments
Maximising use of a couple’s allowances, reliefs and exemptions
This course of action is obvious and can be achieved by a transfer of appropriate investment assets/income between the couple. Transfers of assets between couples living together attract no capital gains tax at the time and transfers should be exempt for inheritance tax purposes. Tax savings/benefits are most apparent when assets are transferred from a higher taxpaying spouse to a lower taxpaying spouse.
For the next tax year, the starting rate band for savings income will widen from £2,880 to £5,000 and the rate will drop from 10 per cent to 0 per cent. The new marriage allowance becomes available from 2015/16 and is worth up to £212 in tax saving.
Using tax-efficient investments
Especially for those paying the higher or additional rate of income tax, it is most important people invest in the most tax-efficient way possible.
The Isa is still the main method of investing savings with freedom from income tax and CGT without giving up the flexibility of access to the investments.
The overall annual contribution limit is now £15,000 (rising to £15,240 for tax year 2015/16), which can be split between the cash and stocks and shares elements as the investor chooses. This means a couple could, between them, invest £30,000. A child aged 16 or over can invest £15,000 in a cash Isa in this tax year. There are no carry forward provisions for contributions to Isas – like the CGT annual exemption, the choice is to “use it or lose it”.
In its Autumn Statement, the Government announced a widow/widower can also inherit an Isa from their deceased spouse and keep the tax-free wrapper as well as continue to pay contributions to their own Isa.
Naturally, no tax relief applies on an investment to an Isa but income and capital gains are free of tax. The credit on a dividend is not recoverable and so, for the basic rate taxpayer, an Isa invested in equities gives no income tax advantage. However, for a 40 per cent taxpayer, tax freedom means the net dividend income yield improves by 33.3 per cent and for a 45 per cent taxpayer by 44 per cent. Investors who are 45 per cent taxpayers are more likely to be utilising their annual CGT exemption on a regular basis and so, for them, an investment in an Isa is almost essential.
The Junior Isa is available to any UK resident child, under age 18, who does not have a Child Trust Fund account. The tax benefits are the same as for Isas: any individual may contribute and the maximum overall contribution is £4,000 this tax year and £4,080 in the next tax year.
Children aged 16 and 17 are able to put cash into an Isa and have a Jisa, which means a maximum total subscription of £19,000 for 2014/15. It must be remembered, however, that where a parent provides the capital for a cash Isa for a 16-17 year old child, the “£100 rule” on parental settlements will apply. The “£100 rule” does not, however, apply to Jisas.
Growth-oriented unit trusts/Oeics
Given the relatively high rates of income tax as compared to the current rates of CGT, it can make tax sense to invest for capital growth as opposed to income. Not only will there be no tax on gains accrued or realised by the fund managers, it should also be possible to make use of the investor’s annual CGT exemption on later encashment (or both annual CGT exemptions for couples).
Single premium investment bonds
Single premium investment bonds can deliver valuable tax deferment for a higher/additional rate taxpayer, especially so when the underlying investments are income producing. This is because no taxable income arises for the investor during the “accumulation period” and capital gains (after indexation allowance) realised by the UK life fund suffer corporation tax at 20 per cent as opposed to the 28 per cent top rate of CGT that applies to individuals. The investor will receive a basic rate tax credit for deemed taxation in a UK life fund meaning that, on eventual encashment, a tax charge will only arise if the investor (after top-slicing relief) is then a higher rate or additional rate taxpayer.
More tax efficiency at fund level can be achieved via an offshore bond because there is no internal tax charge on investment growth. However, there is then no tax credit for an investor.
Venture capital trusts and Enterprise Investment Schemes
VCT and EIS rules are regularly revised, with the latest, a tweaking in the eligible investment rules, due from April. There is the possibility of further changes following a consultation paper issued last summer in response to revised EU state aid rules. The current tax benefits of VCTs and EISs are detailed in table two.
VCTs and EISs are high-risk investments in small unlisted companies and should, therefore, only form a small part of a well-diversified investment portfolio.
CAPITAL GAINS TAX
There are four very effective forms of CGT planning as follows:
Using the annual CGT exemption
For higher and additional rate taxpayers use of the annual exemption (£11,000 for 2014/15) can save up to £3,080 in tax. For a basic rate taxpayer the tax saving is worth up to £1,980. As far as possible it is important to use the annual exemption each tax year because any unused exemption cannot be carried forward.
Maximising the use of a couple’s exemptions and lower tax rates
If an individual is a higher/additional rate taxpayer and their spouse is not it makes sense for the higher/additional rate taxpayer to transfer assets into their spouse’s name to utilise that spouse’s annual exemption on subsequent disposal. This can be achieved by an outright and unconditional lifetime transfer. This should not normally give rise to any IHT consequences or CGT implications.
Indeed, it may even be worthwhile transferring an asset showing a gain of more than the annual exempt amount if the result would be for the surplus capital gain to be taxed at 18 per cent rather than 28 per cent.
Pension contributions to reduce the tax on capital gains
Those who are realising a taxable gain may have taxable income around the basic rate limit (£31,865 for 2014/15). This means that a significant part of any taxable gains is likely to suffer CGT at a rate of 28 per cent (because, when added to taxable income, gains cause the basic rate limit to be exceeded). By taking action to increase the basic rate limit, it is possible for such a person to save CGT. One method of achieving this is to pay a contribution to a registered pension scheme as the basic rate limit is treated as being increased by the amount of the gross pension contribution.
If the payment of CGT cannot be avoided, then care needs to be taken with the timing of gains:
- A gain realised on 2 April 2015 (the last trading day of 2014/15) will mean tax is payable on 31 January 2016.
- A gain realised on 7 April 2015 (after the Easter holiday weekend) will move the tax payment date to 31 January 2017.
2014/15 saw reductions in both the annual allowance and the lifetime allowance. 2015/16 will see the start of the much-heralded pension flexibility for money purchase schemes, although how many providers will be willing and/or able to handle all the flexibilities from 6 April remains to be seen.
In terms of immediate planning, more significant than the 2015/16 reforms to income payments is the big unknown: what will happen to tax relief on pension contributions after the election? The Labour Party has said it will reduce contribution tax relief to basic rate for those earning more than £150,000, while the Liberal Democrats has talked in terms of a flat rate of relief, possibly 25 to 30 per cent. The Conservative Party has said nothing but one think-tank closely associated with it has also come out in favour of flat rate relief.
A review of an individual’s maximum pension contribution options both sides of 5 April is, therefore, a priority. In theory it is possible, by combined use of the rules on carry forward and pension input periods, to contribute up to £270,000 with full tax relief, spread across the end of tax year 2014/15 and the start of tax year 2015/16, if circumstances permit. £270,000 is represented by 2011/12 – 2013/14 carry forward = 3 x £50,000 plus 2014/15 – 2016/17 (via a pension input period ending after 5/4/16) = 3 x £40,000. In any event, 2014/15 is the last opportunity to carry forward up to £50,000 of unused annual allowance from 2011/12.
The tax year-end is a good time to generally consider a client’s IHT position with a view to making larger gifts. Where ongoing control of the assets gifted is required, a discretionary trust will be useful but care should be exercised not to exceed the available nil-rate band. If the investor needs access and IHT efficiency, a loan trust or discounted gift trust should be considered.
All those concerned about IHT should seek to use their available £3,000 annual exemption(s) before the end of the tax year. Any unused amount can be carried forward for one year only.
Tony Wickenden is joint managing director at Technical Connection