Year End Tax Planning – March 2020

Contents

Introduction.

Make the most of your reliefs and allowances.

Income tax saving for couples.

Child benefit

Partner’s salary.

Directors, and employees.

Dividends.

Letting property.

Capital gains tax planning.

Pension tax planning.

Lifetime allowance.

Contributions.

Tax-efficient investments.

Individual savings accounts.

Enterprise investment schemes.

Venture capital trusts.

Inheritance tax planning.

Charitable giving.

Residence and domicile.

Residence.

Deemed domicile.

Offshore trusts.

UK property owned offshore.

Checklist

Introduction

Make the most of your reliefs and allowances

Planning this year was more difficult than usual, with an election in December 2019 meaning the cancellation of the planned November Budget, which was replaced with a Budget in March 2020.  The March Budget was then largely dominated by the outbreak of Coronavirus.  However, as the year-end approaches, it is more important than ever to make the most of the reliefs and allowances available in case they are not there in the future. This guide offers some advice on the core opportunities you should consider. With ideas affecting income and investment, for couples, company directors and employees, there will be something for everyone. We also provide some essential tips for those making their estate plans.

The advice included here forms the basis of a good financial plan to complete the tax year. If you would like further advice on any of the topics, or to discuss how they affect your individual circumstances, please get in touch.

Income tax saving for couples

Switching income from one spouse or civil partner to the other can help save tax.

You should always aim to use both individuals’ personal allowances (£12,500 in both 2019/20 and 2020/21) and to minimise any higher and additional rate tax.

• Income over £150,000 is currently taxed at 45%, or 38.1% for dividend income. The rate is slightly higher in Scotland.
• The personal allowance is withdrawn where income (less certain deductions) is more than £100,000.
• You might be able to reorganise your financial affairs between you to avoid exceeding one of these limits.
• Note that capital gains tax (CGT) may be payable on switching ownership of an investment asset if you are not married or in a civil partnership.

You can each receive £2,000 of dividends tax free in 2019/20 and 2020/21 regardless of your tax status. Reorganising your shareholdings between you may make better use of this limit.  You can also receive £1,000 of savings income tax free if you are a basic rate taxpayer, or £500 if a higher rate taxpayer.

If you or your partner have little or no earnings or pension income, you might also benefit from a 0% tax rate on up to a further £5,000 of savings income.  Again, shifting assets between you can help minimise tax on your savings income.  A £1,000 tax-free allowance is available for income from property, such as where a parking space is let out, so joint ownership could result in a modest tax saving.

Child benefit

Where either partner has income of £50,000 or more then child benefit is effectively withdrawn. This is totally withdrawn if income is over £60,000, and partially withdrawn for income between £50,000 and £60,000. You may be able to keep some or all of your child benefit by switching income between partners, or by taking other steps to bring your income below one of these limits.

Partner’s salary

If you are in business, you could pay an otherwise non-earning partner a salary, on which you will get tax relief.  You normally must keep PAYE records even if the salary is below the national insurance contributions (NICs) limit, which is £118 per week in 2019/20 and £120 per week in 2020/21. If, however, the weekly salary is between £118 and £166 in 2019/20 and between £120 and £183 in 2020/21, your partner will avoid paying any NICs, but will still qualify for state benefits.

You can also pay an employer’s contribution to your partner’s personal pension plan. There are no taxes or NICs on the payment itself, and it should be an allowable business expense. However, the total value of your partner’s salary, benefits and pension contributions must be justifiable in relation to the work performed.

Alternatively, you could plan ahead to share the profits of your business by operating as a partnership in 2020/21. You both need to be genuinely involved as business partners, though not necessarily equally.

Planning point

Although some planning is possible before the end of 2019/20, you will gain the maximum income tax saving if plans are put in place before 6 April 2020 so that you benefit for the entire 2020/21 tax year.

Directors, and employees

Bringing forward or delaying income could be a sensible approach if you think that next year’s level of income will be different to this year’s.

• If your income will fall below £150,000 in 2020/21, you might be able to avoid the additional or top rate of income tax this year by delaying a bonus until after 6 April 2020.
• If your income is less than £150,000 this year but is expected to exceed that figure next year, you could bring forward income into 2019/20 to avoid the additional or top rate next year.

A similar strategy can keep your income below the level at which you would lose your personal allowance. Alternatively, you could sacrifice salary to bring your income below any of the thresholds in exchange for a tax-free employer’s pension contribution.

Key considerations

• If you are going to work abroad for more than a year, it may help to leave the UK before 6 April 2020. There are complex rules around residency, so you should take specific advice.
• This is also a good time to review your company car situation given the planned changes for 2020/21. Choosing to drive a fully electric car will mean you pay no company car tax for 2020/21, with a small charge the following year. Ultra-low emission hybrid cars with a high electric motoring range will also benefit from a low tax cost. In contrast, the tax on company cars with higher CO₂ emissions will increase next year, so switching to an electric or hybrid model will mean significant tax and NICs savings for you and your company, as well as reducing other costs.
• If your business is affected by the personal service company rules (IR35), it is important to calculate how much salary to draw before 6 April 2020 to avoid being taxed on a ‘deemed payment’. You also need to plan for the off-payroll working rules that will apply to IR35 engagements from 2020/21 onwards.

Dividends

You should consider paying a dividend before 6 April 2020 if you operate your business as a limited company, particularly if you have not already made full use of the £2,000 tax-free allowance.

You could even give shares to your spouse or civil partner shortly before paying a dividend, provided you genuinely transfer ownership. It is advisable to leave as much time as possible between the gift and the subsequent dividend payment.

Planning point

There are now fewer tax advantages to running a business as a limited company than was previously the case. Given the current uncertainty over the direction in which tax rates could go, you might want to delay incorporating your business until there is more clarity.

Letting property

Since 6 April 2017, unincorporated businesses with turnovers of up to £150,000 default to calculating taxable profits on a cash basis. Anyone wishing to continue using the accruals basis must elect annually to do so. The deadline for electing for 2019/20 is 31 January 2021.

Expenses incurred wholly and exclusively in connection with the rental business are generally deductible, but relief for interest has been progressively restricted since 6 April 2017.  With effect from 6 April 2020 relief will only be available at the basic rate of 20%.

Also effective from 6 April 2020 is the change to the application of residential lettings relief from CGT on the disposals of let property. Previously, properties which had been occupied at any time as the main residence of the vendor benefitted from an additional relief which meant that gains of up to £40,000, in addition to the amount exempted by the main residence relief, would be free of CGT.

The new rules mean that in future the relief for the additional £40,000 will only be available where the vendor and their tenant are in occupation of the property at the same time.

Capital gains tax planning

By planning, you can minimise your capital gains bill.

The main change to CGT announced in the March 2020 Budget was the widely expected restriction to entrepreneur’s relief.  The lifetime allowance of £10 million was slashed to £1 million for disposals on or after 11 March 2020. Otherwise, little has changed.

Everyone has an annual CGT exempt amount, which in 2019/20 makes the first £12,000 of gains free of tax.  This figure rises to £12,300 in 2020/21.

• Most gains above the exempt amount are taxed at 10% where taxable gains and income are less than the basic rate limit of £37,500 in both 2019/20 and 2020/21.
• The rate is 20% on gains that exceed this limit.
• Residential property gains are taxed at 18% and 28%

You should generally aim to use your annual exempt amount by making disposals before 6 April 2020.  If you have already made gains of more than £12,000 in this tax year, you might be able to dispose of loss-making investments to create a tax loss. This could reduce the net gains to the exempt amount.

Timing disposals

If your disposals so far this tax year have resulted in a net loss, the decision on whether to dispose of investments to realise gains before 6 April 2020 will depend on the amounts involved.  Depending on your level of income, timing your disposals either before or after the end of the tax year could result in more of your gains being taxed at 10% rather than 20% (or 18% instead of 28%).

Transferring assets between married couples or civil partners before disposal might save CGT, particularly where one partner has an unused exempt amount, has not fully used their basic rate tax band or has capital losses available. You should generally leave as much time as possible between the transfer and the disposal.

CGT is normally payable on 31 January after the end of the tax year in which you make the disposal.  You could therefore delay a major sale until after 5 April 2020 to give yourself an extra 12 months before you have to pay the tax.  However, from 6 April 2020, a payment on account of CGT must be made within 30 days of a residential property disposal (where it is not an exempt principal private residence disposal). This means CGT will be payable much sooner for a non-exempt residential property disposal made early in 2020/21, compared to one made during 2019/20.

Planning point

Timing your disposals is particularly important if disposals in this tax year have resulted in a net loss. Depending on the level of your income, making a disposal either side of the tax year end could save or cost you tax.

Your shares or assets might have become virtually worthless. If so, you can claim the loss against your capital gains without actually disposing of the asset by making a negligible value claim. You can backdate the loss relief to either of the two tax years before the one in which you make the claim, provided that you owned the asset in the earlier year and it was already of negligible value. The deadline for backdating a claim to 2017/18 is 5 April 2020.

Pension tax planning

Investing in a pension plan is usually worthwhile because of the tax privileges.

Pension funds are broadly free of UK tax on their capital gains and investment income. When you take the benefits, up to a quarter of the fund is normally tax free, but the pension income will be taxable.

Most people aged 55 and over can draw their pension savings flexibly. Withdrawals above the tax-free amount are liable to income tax at your marginal rate. You should take advice before accessing pension savings as there are several options and they will generally have a long-term effect on your financial position.

Lifetime allowance

The maximum you can hold in a tax-favoured pension scheme without triggering an extra tax charge is £1,055,000 in 2019/20 and will rise to £1,073,100 in 2020/21 in line with the rise in the consumer price index (CPI).

Planning point

If you plan to draw from your pensions and have funds just over the current £1.055 million lifetime limit, you might want to delay taking benefits until after 5 April 2020.

Contributions

There is an annual limit of £40,000 on pension contributions that qualify for tax relief, although this limit is tapered down to a minimum of £10,000 if your income exceeds £150,000 in 2019/20 and £240,000 in 2020/21. You can, however, carry forward unused annual allowances for up to three years to offset against a contribution of more than the annual limit. For people already drawing a flexible income from a pension, the annual allowance is £4,000.

Other points:

• You can pay up to the whole of your earnings into a pension scheme, but the tax relief is capped by the annual allowance plus any unused allowances brought forward.
• Tax relief on pension contributions is at least 20%, and higher or additional rate taxpayers receive relief at 40% or 45%. In Scotland, intermediate, higher and top rate taxpayers receive relief at 21%, 41% or 46%. Limiting your contributions to amounts that qualify for at least 40% tax relief will give you the most benefit.
• Effective relief can be as high as 60%, or 61.5% in Scotland, where the personal allowance is being withdrawn, and can be even higher if tax credits are being withdrawn.
• You could set up a pension for your partner or children since they don’t need earnings to build up to £3,600 in a personal pension. Even if they do not pay any tax, they can still benefit from 20% tax relief.

 Tax-efficient investments

Some investments have income tax and CGT advantages.

Individual savings accounts

You can invest in one cash individual saving account (ISA), one stocks and shares ISA and one innovative finance ISA in each tax year. If you are aged 18 to 39, you can also invest up to £4,000 in a lifetime ISA. However, the maximum investment limit of £20,000 for both 2019/20 and 2020/21 applies across all four types of ISA. It may be invested in one type of account or split between two or more of the four. ISAs are free of UK tax on investment income and capital gains, and there is a wide choice of investments, including peer-to-peer lending in the innovative finance ISA.

The government adds a 25% bonus to investments of up to £4,000 a year in a lifetime ISA. You can use these savings to help buy a first home or keep the funds for retirement. A lifetime ISA will be a more attractive approach to retirement saving than a traditional pension for some, or you can, of course, opt for both forms of pension saving.

Remember that 16- and 17-year-olds can open a cash ISA, but the rules effectively prevent you from opening an ISA for them. Parents and others can contribute to a junior ISA for children up to 18 who do not have a child trust fund. The contribution limit is £4,368 in 2019/20, rising to £9,000 in 2020/21, although funds are locked in until the child is 18.

Planning point

While the £500/£1,000 savings income allowance and the £2,000 dividend allowance mean that ISAs no longer offer significant tax advantages for many savers, they remain valuable for wealthier investors and those who build up substantial tax-free savings by regularly investing the annual maximum.

Enterprise investment schemes

The enterprise investment scheme (EIS) gives tax relief for investing in new shares in relatively small qualifying trading companies that are not listed on any stock exchange. The seed enterprise investment scheme (SEIS) is similar, but aimed at smaller start-up companies.

Income tax relief

An EIS receives income tax relief at 30% on up to £1,000,000 a year invested, plus a further £1,000,000 invested in knowledge-intensive companies. A SEIS receives 50% relief on investments of up to £100,000 a year.

CGT reliefs

Gains from both EISs and SEISs escape CGT after three years.

• EIS – It is possible to defer CGT on a gain of any size, on the disposal of any asset, by reinvesting the gain in shares that qualify under the EIS. An EIS investment can be used to defer gains made up to three years earlier.
• SEIS – Half the investment can be matched with gains arising on the disposal of assets, with the matched portion being exempt from CGT. This can give total tax relief of 60% – 50% income tax relief plus 10% CGT relief (half of the normal higher CGT rate of 20%).

Venture capital trusts

You can obtain income tax relief of 30% by subscribing up to £200,000 for shares in venture capital trusts (VCTs) in 2019/20. Gains are generally exempt from CGT. VCTs are investment trusts that invest in a range of relatively small trading companies.

It is important to remember that EIS/SEIS shares and VCTs are high-risk investments. They may be difficult to sell and you should take specialist advice.

Inheritance tax planning

Most IHT planning is not related to the tax year end, but this is as good a time as any to review your will.

Inheritance tax (IHT) is payable if a person’s assets at death, plus gifts made in the seven years before death, add up to more than the nil rate band, currently £325,000. An additional nil rate band is available where a residence is left to direct descendants – £150,000 in 2019/20, increasing to £175,000 in 2020/21 and later years. However, there is a tapered withdrawal of the additional nil rate band for estates worth more than £2 million.

When a surviving spouse or civil partner dies, their estate will generally benefit from any unused IHT nil rate band of their previously deceased spouse or partner, up to the £325,000 maximum.  Any unused additional nil rate band can similarly be transferred, up to a limit of 100% of the maximum available amount at the time of death of the surviving spouse or civil partner.

There are several reliefs and exemptions, some of which are related to the tax year.

• Gifts totalling up to £3,000 in a tax year are exempt from IHT. If you didn’t use this exemption in 2018/19, you can make IHT-free gifts of up to £6,000 before 6 April 2020. If you have already used your exemption for 2019/20, you could delay your next gift until after 5 April 2020 to take advantage of the 2020/21 exemption.
• Regular gifts out of excess income can also be exempt. You need careful documentation to prove that you make the gifts from income rather than capital.
• There are a number of other reliefs available.

IHT could see significant change over the coming years following a review by the Office of Tax Simplification. One recommendation is that the seven-year survival period be reduced to five years, but with taper relief abolished.

Charitable giving

You can get tax relief for any gifts to charity if you make a gift aid declaration.

You make the gift out of your taxed income and the charity benefits by claiming back basic rate tax on the value of the gift. Higher and additional rate taxpayers can claim an extra 20% or 25% in relief. Intermediate, higher and top rate taxpayers in Scotland can claim an extra 1%, 21% or 26% in relief.

You can obtain both income tax and CGT relief on gifts to charities of shares listed on the stock market and certain other investments.

Gifts to charity are free of IHT, so remembering a charity in your will can reduce the total amount of IHT that will be paid on your estate. If 10% of your net estate is left to charity, then the rate of IHT payable will be reduced from 40% to 36%.

Residence and domicile

There have been and continue to be a considerable number of changes affecting non-UK domiciled individuals and non-UK resident trusts and the use of offshore corporate vehicles to hold high-value UK residential properties.

Residence

An individual’s residence status for UK tax purposes is determined in accordance with a Statutory Residence Test.  If you are neither automatically resident or non-resident under the SRT rules, you should review days spent in the UK and connecting ties in the UK and elsewhere for the current and future years.

Deemed domicile

New rules were introduced with effect from 6 April 2017 which deem an individual who has been resident in the UK for at least 15 out of the last 20 years to be domiciled in the UK for all tax purposes. Deemed domicile status will apply with effect from 6 April 2020 for those who arrived in 2005/06 and have been continuously UK resident ever since.

The reforms restrict access to non-domicile status for individuals who were “formerly domiciled residents” (i.e. individuals born in the UK with a UK domicile of origin).  If this applies to you and you return to the UK, you will be treated as UK domiciled from the first year of UK residence.

Where a non-UK domiciliary has claimed the remittance basis of taxation, there are strict rules for determining capital, income and gains remitted to the UK.  It is essential to have separate offshore bank accounts to separate funds into three categories, i.e. income, capital gains and clean capital so it is clear exactly what is being remitted to the UK.  Where funds contain a mixture of income and/or capital gains and/or capital, there are complicated rules for determining what is being remitted to the UK and it is virtually impossible to make a remittance which would not be subject to UK tax.

Offshore trusts

From 6 April 2018, legislation has been introduced to ensure that payments from an offshore trust intended for a UK resident individual do not escape tax when they are made via an overseas beneficiary or a remittance basis user.

However, protections apply to foreign settlor-interested trusts set up by non-domiciled individuals (whether deemed domiciled under the new rules or not), but not formerly domiciled returning individuals.  These protections allow income and gains to be rolled up in the trust if all the necessary conditions are met.  Should the settlement become “tainted”, the capital gains tax and income tax protections for trusts will not be available.

Non-domiciled individuals who are not already deemed-domiciled under the new rules should consider the creation or further use of foreign trusts to hold investments.

UK property owned offshore

From April 2019, non-residents have been liable to UK capital gains tax on the disposals of all UK immoveable property, including commercial property, extending existing rules that previously only applied to residential property. The charge applies to direct and indirect disposals.

UK residential property interests held indirectly in an offshore wrapper have been subject to inheritance tax since 6 April 2017. Indirect holdings of UK commercial property are not chargeable to inheritance tax.

Non-UK companies renting out UK property will move from the income tax regime to the corporation tax regime from 6 April 2020. Companies with borrowings could be affected by corporate interest restrictions, and this could result in an overall tax increase. Such companies should seek advice on the impact of this forthcoming change.

Planning point

If you intend to leave from, or move to, the UK, ensure that you are aware of the maximum number of days you can spend in the UK to avoid being UK resident and that you understand how you will be taxed in both the UK and the other country. Take appropriate advice before moving!  

Checklist

• Could you transfer income to your partner to minimise higher and top rate taxation next year, to maximise the tax-free savings and dividend income limits, or to avoid losing child benefit?
• Have you considered the timing of dividends and bonuses to minimise tax rates?
• Have you used your annual CGT exempt amount by making any available disposals before 6 April 2020?
• Have you used this year’s ISA allowance and made any other tax-efficient investments before 6 April 2020?
• Are you investing enough in your pension (or possibly a lifetime ISA) if you wish to, or have to, retire earlier than state pension age, which is likely to keep going up?
• If you are aged over 55, have you taken advice about the options for drawing your pension savings?
• Have you made gifts to use your annual IHT allowances?

If you would like to discuss anything covered in this guide in more detail, please do not hesitate to contact Charles Green on +44 (0)20 8652 2450 or via email at crg@clarksonhyde.com. 

Year End Tax Planning – March 2020