Make the most of your reliefs and allowances
UK property owned by non-residents
After a fiscally turbulent year – including September’s mini-Budget which Rishi Sunak’s new government rapidly unpicked – tax rises, both overt and stealthy, are the order of the day.
The 1.25% social care levy that was set to be introduced from April 2023 will not be implemented, nor will dividend tax rates benefit from this 1.25% reduction. Instead, from 6 April 2023, the additional rate threshold and top rate thresholds in Scotland will be reduced to £125,140, the dividend allowance is down to £1,000 and the capital gains tax (CGT) annual exempt amount will fall to £6,000.
The personal allowance will now remain at £12,570 until 2027/28 and the higher rate threshold will stay at £50,270 – the levels that first took effect in 2021/22. With inflation at 10.7%, these measures will result in increased taxation for many. Rising interest rates and higher energy costs will also add to the financial pressure on individuals and businesses.
So, it is more important than ever to make the most of reliefs and allowances while they are still available. This guide offers some advice on the principal opportunities you could consider and forms the basis of a good financial plan to complete the tax year. With ideas affecting income and investment, for couples, company directors and employees, and self-employed individuals, there will be something for everyone.
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 partner to the other can help save tax.
Always aim to use both individuals’ personal allowances (£12,570 in 2022/23, and frozen at this level until 2027/28).
If either spouse or a civil partner will not be able to use their personal allowance for 2022/23, then claiming the marriage allowance will save the other spouse or civil partner up to £252 in tax. However, a claim can only be made if the recipient does not pay tax above the basic rate. Claims can be backdated for four tax years, so the advantage of making a claim by 5 April 2023 is the inclusion of 2018/19. Also try to minimise any higher and additional (top) rate tax.
You can each receive £2,000 of dividends tax free in 2022/23 regardless of your tax status. Reorganising your shareholdings between you may make better use of this limit, which will be reduced to £1,000 next year. You can also receive £1,000 of savings income tax free if you are a basic rate taxpayer, and £500 if paying tax at the higher rate.
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 in effect withdrawn. The withdrawal is full 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 you and your partner, or by taking other steps to bring your income below one of these limits.
You may be able to reorganise your finances now to make use of some of these opportunities for 2022/23, but you should plan ahead for 2023/24 to gain the maximum income tax saving.
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 NICs limit, which is £533 a month in 2022/23. If, however, the salary is between £533 and £1,048 a month (£823 up to 5 July 2022), your partner will avoid paying any employee NICs, but will still qualify for state benefits. A small amount of employer NICs will be payable if the salary exceeds £758 a month.
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 2023/24. You both need to be genuinely involved as business partners, though not necessarily equally.
If you are thinking about incorporating your business, you need to take into account the rise in corporation tax from 1 April 2023 from 19% to 25% for company profits over £50,000, with a marginal rate of 26.5% on profits falling between £50,000 and £250,000.
Bringing forward income could be a sensible approach if you are not currently an additional rate taxpayer but expect to be affected by the reduction in the additional rate threshold.
You could consider a similar strategy to 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 or a low-emission company car.
If you have had to work from home this year, you can claim a tax-free amount of £312 for 2022/23 to cover the additional costs involved (provided your employer does not reimburse them). It doesn’t matter how many weeks you actually work from home. You can use HMRC’s online portal before 6 April 2023 so that you receive the benefit via your PAYE code for 2022/23. However, this relief is only available if you have to work from home, not if you simply choose to do so.
The current dividend tax-free allowance of £2,000 will fall to £1,000 in 2023/24. If you are the owner of a limited company, it would be wise to ensure you make use of the dividend tax-free allowance for 2022/23. Similarly, if you are a higher rate taxpayer and may become an additional rate taxpayer in 2023/24 (or Scottish top rate taxpayer), you could bring forward a dividend to avoid the additional rate (or Scottish top rate) next year. This could also help if the income falls into the basic rate band this year (or Scottish starter, basic or intermediate rate bands). But you should avoid bringing forward a dividend if it is likely to fall into a higher band this year than next year.
You could even give shares to your spouse or civil partner shortly before paying a dividend if they pay tax at a lower rate than you, provided you genuinely transfer ownership. It is advisable to leave as much time as possible between the gift and the subsequent dividend payment.
The director/employee tax planning approach around income levels applies equally to people who are self-employed.
If you are self-employed, you might be able to affect the timing of your taxable profits to avoid paying tax at 45% (46% in Scotland this year, and 47% next year), but this will depend on your accounting date.
Complicating matters in 2023/24 is the transition to taxation of business profits actually arising in the tax year. This will impact those not currently on a 5 April/31 March year end. For 2023/24, taxable profits will be based on the 12 months from the end of the 2022/23 basis period, plus a transition component running from the end of this 12 month period to 5 April 2024. Any overlap profits you might have will be relieved in full in 2023/24.
Additional profits arising from the transition will be spread over a five-year period, but businesses will be able to opt out of spreading. Any decision on spreading profits should take into account the reduction in the additional rate threshold and the fact that the personal allowance and higher rate thresholds are frozen.
Some careful forethought can help minimise your capital gains tax (CGT) bill this year.
Everyone has an annual CGT exempt amount, which in 2022/23 makes the first £12,300 of gains free of tax. For 2023/24, this amount will be reduced to £6,000, with a further cut to £3,000 to follow.
You should generally aim to use your annual exempt amount by making disposals before 6 April 2023. 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 2023 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 2023 to give yourself an extra 12 months before you have to pay the tax (but be careful of the impact of the reduction in the exempt amount). However, a payment on account of CGT must be made within 60 days of a residential property disposal (other than of an exempt principal private residence). There is therefore no timing advantage to delaying such a disposal.
Timing your disposals is particularly important if disposals in this tax year have already resulted in a net loss. Depending on the level of your income, making a further disposal either side of the tax year end could save or cost you tax.
A shareholding or another chargeable asset might have lost virtually all value. 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 2020/21 is 5 April 2023.
The tax privileges of investing in pension plans generally make them a key focus in tax planning.
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 (rising to 57 in 2028) 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 standard lifetime allowance and annual allowance were left untouched in the Autumn Statement of 17 November 2022, but a future reduction in tax relief for pension contributions remains a possibility. You might want to maximise your pension contributions for 2022/23 by making further contributions before 5 April 2023.
The maximum you can hold in a tax-favoured pension scheme without triggering an extra tax charge is £1,073,100 in 2022/23. The allowance will be frozen at this level until 2027/28.
The real value of the lifetime allowance is falling, so a pension plan may not provide enough for your retirement needs. Therefore, consider other forms of saving.
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 £4,000 if your income exceeds £240,000. 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 also £4,000.
Some investments have income tax and CGT advantages.
Individual saving accounts (ISAs) have income tax and CGT advantages.
You can invest in one cash ISA, one stocks and shares ISA and one innovative finance ISA in each tax year. ISAs are free of UK tax on investment income and capital gains. 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 2022/23) applies across all four types of 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 (but be wary of the property price cap of £450,000) 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.
The decisions can be complex so taking advice is essential. You will incur a lifetime ISA government withdrawal charge (currently 25%) if you transfer the funds to a different ISA or withdraw the funds before age 60 and you may therefor get back less than you paid into a lifetime ISA.
Although 16- and 17-year-olds can open a cash ISA, 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 2022/23.
There is nothing to report about ISAs on your tax return and ISAs are effectively inheritable by a surviving husband/wife or civil partner.
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 2022/23. 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 (IHT) planning is generally not related to the tax year end, although this is as good a time as any to review your will and ensure your stated wishes are up to date.
There are, however, certain IHT exemptions that are related to the tax year.
Charities make a difference to millions of lives in the UK and around the world. Whatever cause you care about there will be a charity working on it. Remember you can get tax relief for any charitable gifts if you make a gift aid declaration.
You make the gift out of your taxed income and the charity can claim 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 (1%, 22% or 27% next year).
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 at least 10% of your net estate is left to charity, then the rate of IHT payable on the remainder of your estate 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, you should review the number of days spent in the UK and sufficient ties in the UK and elsewhere for the current and future years.
New rules were introduced with effect from 6 April 2017 as per which a non-domiciled individual who has been resident in the UK for at least 15 out of the previous 20 tax years will be deemed to be domiciled in the UK and will need to report their worldwide income and gains. Deemed domicile status will apply with effect from 6 April 2024 for those who arrived in 2008/09 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 have moved 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.
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 value of tax reliefs depends on your individual circumstances. Tax laws can change. The report represents our understanding of law and HM Revenue & Customs practice. Tax rates may differ in Scotland. © Copyright 16 March 2020. All rights reserved.|