End of Tax Year Planning
It's that time again! The end of the tax year can be a burden for some, however, it can also present an array of useful financial planning opportunities. We've put together some pointers that could help you to make the most of this time of year.
Self Assessment Dates
It’s your last chance to make use of any remaining ISA allowance that you may have. You can contribute up to £20,000 in the 2018/19 tax year, and this same allowance will apply to the 2019/20 tax year too. You can hold multiple different ISAs, although you can only pay into one Cash ISA and one Stocks & Shares ISA in each tax year. Investment growth is free from Capital Gains Tax (CGT), and any dividends or income received from money held in an ISA is virtually free from Income Tax.
One commonly held misconception surrounding ISAs is their tax treatment upon the account holder’s death; ISAs are not free from Inheritance Tax (IHT). However, if your spouse or civil partner has passed away, you may be entitled to an additional ISA allowance which is equal to the value of the spouse’s ISA on the date of their death. This doesn’t mean that you inherit the money from your spouse’s ISA; this money is still included in their estate and is subject to IHT rules. What it does mean, is that your personal annual ISA allowance is increased by the value of the deceased’s ISA holdings. This is known as “Additional Permitted Subscriptions”, and is a potentially valuable tax benefit that few eligible individuals are making use of (https://www.moneywise.co.uk/news/2019-01-02/thousands-bereaved-spouses-pay-unnecessary-tax-inherited-isas).
2. Capital Gains Tax (CGT)
If you have investments held outside of an ISA, in a general investment account for example, you may not be able to benefit from the same favourable tax treatment on offer. It can therefore be beneficial to sell some of your investments each tax year and use the cash to re-purchase investments within an ISA. If you make an overall capital loss on your investments, it is important to declare this loss on your tax return. It won’t change the amount of tax that you pay in that tax year, but the losses can be carried forward in order to offset capital gains in future tax years. Higher rates of CGT are payable on gains from property that is not your main residence. Inter-spousal transfers are exempt from CGT. It can therefore be that, for higher or additional rate taxpayers, it can be prudent to transfer assets to a basic rate or non-tax paying spouse, who can then encash the investments and potentially pay a lower rate of tax, or even pay no tax at all if they have sufficient CGT exemption left to offset.
The CGT annual exempt amount is £11,700 in the 2018/19 tax year, rising to £12,000 in the 2019/20 tax year.
3. Dividend Allowance
Make use of your dividend allowance – this has been dropped to £2,000 more recently, but the income tax rates payable on dividends is still more favourable than on other forms of income – 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. This is worth considering in terms of the types of income being produced by your investments, or for ltd company directors in terms of pay structure (it is worth remembering that corporation tax must be paid at 19% on profits before they can be paid as dividends).
4. Children and Grandchildren
You may like to consider arranging investments for a child or grandchild, either in the form of a Junior ISA (JISA) or a Pension. The money in the JISA cannot be accessed until the account holder reaches 18, and the money in a pension cannot be accessed until they reach at least age 60 (based on current legislation). Both tax “wrappers” allow you to invest money on a child’s behalf, so that they can benefit from the long-term effects of investing and compound growth. You can contribute up to £4,260 into a JISA in the current tax year, and up to £3,600 into a pension (assuming the pension holder is a non-taxpayer, it could be more if they are a taxpayer).
5. Private Pensions
It might be that you have a lump sum available to contribute to a pension. You may be able to contribute up to £40,000 to pensions in a tax year (or up to the level of your annual earned income if this is lower), subject to your personal tax circumstances. The maximum amount that you can contribute is reduced to £4,000pa if you start to access your pensions in certain ways (it is worth double-checking which rules you are subject to with you adviser). Tax relief on pension contributions is granted at the individual’s highest marginal rate of tax – this 20% relief for basic rate taxpayers, 40% relief for higher rates taxpayers, and 45% relief for additional rate taxpayers. Certain types of pension contribution have the added benefit of reducing an individual’s adjusted net income, which could help you to regain part/all of your entitlement to child benefit (if your income can be reduced below £60,000), or could help you regain part/all of your personal allowance (if your income can be reduced below £123,700).
When tidying up at the end of a tax year, it is also worthwhile to review your pension beneficiary arrangements: Have you nominated any beneficiaries? If so, are your nominations still relevant? You may also wish to review your wills, or if you do not have wills in place, it could be an excellent opportunity to take action. Power of Attorneys are also an invaluable aspect of personal planning – they allow an appointed person to make decisions on your behalf in the event that you may lose the mental capacity to make these decisions on your own. Terms can cover property (all property e.g. personal assets) and financial affairs, and/or health and welfare.
6. State Pension
It may also be beneficial to check your State Pension entitlement by submitting a BR19 form to HMRC – if you are falling short of the necessary National Insurance (NI) contribution record, you may be able to make voluntary Class 3 NI contributions in order to improve your record, and increase your future State Pension entitlement. Class 3 NI contributions are a very effective way to boost your retirement income, and are often worth taking advantage of if they are available and applicable to your circumstances. You can usually pay voluntary contributions in relation to the past 6 years, and the deadline for paying these is 5th April each year. This means that you would have until 5th April 2019 to make up for gaps from the 2012/13 tax year. For further information, visit https://www.gov.uk/voluntary-national-insurance-contributions.
An individual can give away up to £3,000 of gifts each tax year without this being considered in the value of their estate for inheritance tax purposes. This is known as your “annual exemption”. Also, you can carry forward any unused annual exemption from the previous tax year, so a couple could gift up to £12,000 in a single tax year (£3,000 x2 per person).
8. Important Dates for Self-Assessment taxpayers in the 2018/19 tax year - (06/04/18 to 05/04/19)