Planning this year was more difficult than usual, with 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 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 base 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.
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 2020/21, increasing to £12,570 in 2021/22) and to minimise any higher and additional rate tax.
You can each receive £2,000 of dividends tax free in 2020/21 and 2021/22 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.
Where either partner has income of £50,000 or more then child benefit is effectively withdrawn. This is total if income is over £60,000, and partial 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.
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 £120 per week in 2020/21. If, however, the weekly salary is between £120 and £183 in 2020/21, your partner will avoid paying any NICs, but will still qualify for state benefits.
Where circumstances permit, you may also be able to 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 from 2020/21 onwards. You both need to be genuinely involved as business partners, though not necessarily equally.
Although some planning is possible before the end of 2020/21, you will gain the maximum income tax saving if plans are put in place before 6 April 2021 so that you benefit for the entire 2021/22 tax year.
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.
A similar strategy can keep your income below the level (currently £100,000) at which you start to 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.
You should consider paying a dividend before 6 April 2021 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.
Where you are required to work at home, your employer can pay you a tax-free allowance of £6 per week (or £26 per month). For periods before 6 April 2020, the tax-free allowance was £4 per week (or £18 per month). This allowance is to cover the additional costs incurred by using your home as a workplace, such as heat, light, metered water, insurance and broadband fees.
If your employer doesn’t pay this allowance, but you are required to work at home for at least some of your working time, you can claim the same amounts as tax deductions from HMRC.
You don’t need to provide evidence of the additional home expenses incurred, if you claim up to £6 per week. Where the additional costs exceed this value, you can claim for the actual expenses incurred, but you will be required to have proof in the form of receipts, bills or contracts.
Previously, one of the tax advantages of running a business as a limited company was the relatively low rate of corporation tax. However, it was announced in the Budget that the main rate of corporation tax will rise to 25% from 1 April 2023. The current rate of 19% will continue to apply where profits are £50,000 or less, with an intermediate rate between the two rates where profits are more than £50,000 but less than £250,000.
When you let rooms in your own home as residential accommodation, you can receive the rent tax-free if it falls within the limits for rent-a-room relief. This relief is currently capped at rents of £7,500 per year. Where more than one person receives the rent from the property, each person has a tax-free exemption for rent of £3,750.
The conditions for rent-a-room relief stipulate that you must occupy the property as your main home at some point in the tax year – this relief can’t cover income from a holiday home or buy-to-let property. Also, the accommodation must be used for residential purposes, not as an office or storeroom.
If you let out land or buildings which don’t qualify for rent-a-room relief, the income could be covered by the £1,000 property income allowance. You can’t use this allowance against rent paid by your own company, a company you work for, or one your spouse is associated with.
If either type of rental income exceeds the relevant allowance, it must be declared on your tax return, along with any related expenses. If the allowance exceeds the actual expenses, you can deduct that allowance in place of those expenses.
Since 6 April 2017, unincorporated businesses with turnovers of up to £150,000 default to calculating taxable profits on the cash basis, subject to the right to elect to continue using the accruals basis. Expenses incurred wholly and exclusively in connection with the rental business are generally deductible, but relief for interest has been progressively restricted and is now only available at the basic rate of 20%.
Also remember that for 2020/21 and later years the application of residential lettings relief from CGT on the disposals of let property has changed. 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.
By planning, you can minimise your capital gains bill.
Everyone has an annual CGT exempt amount, which in 2020/21 makes the first £12,300 of gains free of tax. The March 2021 Budget has fixed this figure until 2026/27.
You should generally aim to use your annual exempt amount by making disposals before 6 April 2021. If you have already made gains of more than £12,300 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.
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 2021 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 2021 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), meaning CGT will be payable much sooner for non-exempt residential property disposals than before.
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 2018/19 is 5 April 2021.
To boost the property market after the first COVID-19 shutdown, the Chancellor introduced a Stamp Duty Land Tax (SDLT) holiday for residential properties. Anyone buying their first or only home in England or Northern Ireland for up to £500,000 would pay no SDLT where the deal is was completed by midnight on 31 March 2021. This deadline has now been extended in the Budget to 30 June 2021 and will be followed by a tapered approach to the end of September in which the nil rate falls first to £250,000 before resuming its normal level of £125,000 on 1 October 2021.
Where the property is located in Wales, Land Transaction Tax (LTT) applies instead of SDLT. The starting rate for LLT was raised to £250,000 for those buying or replacing their main home by 31 March 2021 and this deadline was also extended to 30 June 2021 by the devolved Welsh Government.
In Scotland, purchasers of residential property pay Land and Buildings Transaction Tax and, as in Wales, the threshold was increased to £250,000 until 31 March 2021. However, the devolved Scottish Parliament has confirmed that it will not extend the deadline any further, unlike the rest of the UK.
Max out your state pension
Individuals who reach State Pension Age on or after 6 April 2016 need to have accrued 35 complete years of NICs to receive the full state pension. To receive any UK state retirement pension, you need at least ten complete years.
You can check how much state pension you are due to receive through your personal tax account on gov.uk. We can help you with this.
It is possible to plug gaps in your NIC record by paying voluntary Class 2 or Class 3 NIC. This payment generally needs to be made within six years of the gap year, but there are a number of exceptions which extend that period.
You may also qualify for NI credits for some years if you were claiming state benefits, Child Benefit or were a foster carer. The NI credits were not always applied automatically, so it’s worth checking your own NIC record.
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.
The maximum you can hold in a tax-favoured pension scheme without triggering an extra tax charge is £1,073,100 in 2020/21 and this limit will remain in force until April 2026.
If you plan to draw from your pensions and have funds approaching the current £1.073 million lifetime limit, you might want to start taking benefits before 6 April 2021.
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 £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.
Some investments have income tax and CGT advantages.
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 2020/21 and 2021/22 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 £9,000 in 2020/21 and 2021/22, although funds are locked in until the child is 18.
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.
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.
Gains from both EISs and SEISs escape CGT after three years.
You can obtain income tax relief of 30% by subscribing up to £200,000 for shares in venture capital trusts (VCTs) in 2020/21. 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.
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 of £175,000 is available where a residence is left to direct descendants. These limits have been fixed by the March 2021 Budget for 2020/21 up to and including 2025/26.
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.
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.
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%.
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.
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, your residence status will be determined by the number of ties you have to the UK and the number of days you spend here. If you unexpectedly spend more time here than intended due to unforeseen circumstances, such as the coronavirus travel restrictions, it may be possible to avoid acquiring UK-resident status if this is not desired. However, everyone’s circumstances are unique and appropriate advice should be taken.
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 2021 for those who arrived in 2006/07 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.
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.
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 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 potential impact of this change.
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!
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 firstname.lastname@example.org.
Clarkson Hyde LLP, Chartered Accountants
3rd Floor, Chancery House
St Nicholas Way
This report is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. Tax rates may differ in Scotland. 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. The report represents our understanding of law and HM Revenue & Customs practice. © Copyright 10 March 2021. All rights reserved.