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Technical View

Technical View

As the end of tax year 2015/16 approaches, in this month’s Technical View we recap some of the planning opportunities available to you to consider before 5 April 2016.

Income tax planning

 

  1. Clients who have income in excess of £100,000 for this tax year will lose their personal allowance at a rate of £1 for every £2 of income over this limit. This means that those people who have income over £121,200 will have no personal allowance at all.  By making contributions to a UK registered pension scheme, clients can extend their basic rate band, and regain some or all of the personal allowance, depending upon relevant UK earnings and the amount that can be contributed subject to the annual allowance plus and carry forward available.

  2. For those who pay higher or additional rate tax, they will be able to claim up to a total of 40% or 45% tax relief (20% by the government and 20/25% via self-assessment) on their pension contributions this tax year. The government in the Budget (due on 16 March 2016) very likely will be making an announcement on the tax relief of pension contributions and a popular school of thought is that this will be moving to a flat rate of between 25-35%, so take advantage of the higher tax relief now before it is potentially lost. 

  3. The introduction of the tapered annual allowance means the period until 6 April 2016 is also an opportunity to maximise additional rate tax relief on pension contributions before it comes into effect. To err on the side of caution, it makes sense to maximise pensions savings for these clients before the Budget just in case any immediate changes on pensions tax relief is introduced. 

  4. Changes to dividend taxation means that the 10% tax dividend credit will be abolished and replaced with a £5,000 dividend allowance from 6 April 2016. This means that those who have income in excess of this will now have declare their dividend income via self-assessment and pay tax depending upon their marginal rate of tax. Some clients may not know how these changes will affect them and it is important that they are made aware. 

  5. Consideration should be given to gifting income producing assets to a lower tax paying spouses/ civil partners where appropriate. This inter-spousal transfer is not liable for capital gains tax (CGT) or inheritance tax (IHT) if the donor was to pass away within 7 years of the gift. 

  6. Business owners have some control over the date when dividend payments are made and hence when a tax liability may be charged. Clients should speak to their company accountant about possibly changing the payment date to pre 6 April 2016.


Capital Gains Tax (CGT) planning

 

  1. Being non-UK resident to the UK will not prevent CGT from being applied to UK residential property. Those who may have been looking to sell may wish to do this in the current tax year rather than waiting until after 6 April 2016, but time is running out to do so. Realising gains and utilising the annual exemption (£11,100 tax year 2015/16) allows the overall base cost of the portfolio to be increased without creating a tax charge. This could be useful should there be a need for large cash withdrawals. The CGT allowance cannot be carried forward so it is worth considering using it before it is lost. Note: Need to be aware of the 30 day rule. Market risk can be mitigated by selling, say, a European fund, using the proceeds to buy a European tracker for 30 days before selling this, and buying back the original European fund. 

  2. ​Realising gains and utilising the annual exemption (£11,100 tax year 2015/16) allows the overall base cost of the portfolio to be increased without creating a tax charge. This could be useful should there be a need for large cash withdrawals. The CGT allowance cannot be carried forward so it is worth considering using it before it is lost.

  3. Where assets are held in one spouse’s name, consider transferring the assets into joint names prior to disposal. This is an exempt transfer and if assets are held jointly by spouses, the annual exemption available could be up to £22,200.

  4. If the client has previous capital losses, ensure these are utilised against any gains. If the client has any capital losses from this tax year, ensure they are registered with HMRC. The client has to register their losses with HMRC within four years of the tax year when the loss is made. The client can then use these losses against any future gains on assets chargeable to CGT. 

  5. Consider using a Professional Investment Manager (PIM). Assets can be in-specie transferred and CGT managed out over a number of tax years using the annual exemption and annual ISA allowance. 

  6. Business owners may be able to claim Entrepreneurs Relief on disposal of their company shares or some or all of their business subject to certain rules and the nature of the company. Clients should seek professional advice from an accountant to see whether or not their assets would qualify for this relief. 

  7. Business owners may also be able to claim roll over relief or hold over relief when they sell certain business assets and replace them with more up to date assets or when the person finally sells the business, postponing the payment of CGT. Professional advice from an accountant should be sought for the rules that govern this relief and whether this applies to the client’s circumstances.


Inheritance Tax (IHT) Planning

 

  1. Utilising the annual exemption of £3,000 (£6,000 if you have not used the previous year’s) per individuals, so potentially up to £12,000 for a couple. 

  2. Utilising gifts out of normal expenditure exemption. Records should be kept to show that these gifts are given regularly and made from income surplus to the living expenses of the individuals concerned. 

  3. Consideration could be given to a Deed of Variation where a family member has died in the past two years and there was IHT to pay on the estate. The government has confirmed that they are in agreement with this form of tax planning at present but are keeping it under review. For the variation to take place, all beneficiaries whose shares will be varied, must be in agreement and it is recommended that a qualified solicitor is consulted before any variation is completed. 

  4. Making lifetime gifts over and above exempt gifts. These gifts, whether they are an outright gift or a gift to trust will start a seven year clock which could utilise some or all of an individual’s nil rate band. After seven years the nil rate band gets reset, providing no other gifts are given during that time. These gifts need to be affordable to the client and the financial circumstances of each individual will need to be assessed before making such a gift. 

  5. For non- domiciled spouses or civil partners, if they make an election to be deemed domiciled for IHT purposes then all inter-spousal transfers will be free from IHT. If they do not make this election then the maximum amount that will be deemed free from IHT will be £325,000. Before making this election, professional advice from an accountant should be sought, as there could be implications for assets that are held outside the UK. 

  6. Depending on the personal circumstances, a whole of life policy written into trust might be considered to negate some or all of the potential IHT due on first or second death. 

  7. Business property relief might be able to be claimed by some clients of up to 100% of their value on life time gifts of certain assets or on death. An accountant should be consulted to see if the client is eligible for this relief.


Investments

 

  1. Clients should be looking to maximise their ISA allowance (£15,240 for tax year 2015/16). The ISA allowance applies annually and cannot be carried forward to the new tax year if not fully used, so consideration needs to be given that the client is investing in a tax efficient manner. 

  2. Since December 2014, on death, the surviving spouse or civil partner can now inherit the ISA allowance of their deceased partner in addition to their own ISA allowance. Consideration could be given to this if the circumstances of a particular client mean they have lost their spouse within this tax year. 

  3. The new Help to Buy ISA opened in December 2015 to assist first time buyers get on the property ladder. Consideration could be given to this type of ISA if the client circumstances are suitable and they have not opened a cash ISA this tax year. 

  4. For certain clients Venture Capital Schemes and Enterprise Investment Schemes could be a consideration and give relief to income tax and CGT in some cases. These types of investments can be high risk and the suitability of these investments should be given careful consideration before the recommendation is made.


Pensions

  1. The annual allowance for the current tax year is up to £80,000 but only a maximum of £40,000 can be paid in the post alignment tax year (9 July 2015 – 5 April 2016). For those looking to maximise their pension contributions, clients should ensure these payments are made before the end of the tax year, taking advantage of any unused annual allowance carried forward which may be available.[1] 

  2. Special rules for Money Purchase Annual Allowance (MPAA) means for this tax year only, the MPAA is £20,000 subject to a maximum £10,000 being carried forward to the post aligned tax year. 

  3. From April 2016, a Tapered Annual Allowance will be introduced for those with adjusted incomes over £150,000 at a rate of £1 for every £2, down to a minimum of £10,000 p.a. Individuals with income (excluding pension contributions) of lower than £110,000 will not be subject to a Tapered Annual Allowance.[2] 

  4. From 6 April 2016, the reduction in the lifetime allowance (LTA) from £1.25 million to £1 million will come into force. Consideration should be given as to whether or not some clients wish to crystallise benefits this tax year against the higher LTA if it is suitable for their personal circumstance. 

  5. Fixed protection 2016 (FP2016) and Individual Protection 2016 (IP2016) will not be available until after 6 April 2016. Preparation should be made in collecting the data required for clients to apply for these protections when this opens. For those wishing to apply for FP2016, there can be no pension savings or benefit from 6 April 2016 for this to remain valid. Further details on this can be found in January’s Technical View.

  6. The reduction in the lifetime allowance (LTA) from £1.25m to £1m may also have a beneficial effect on the calculation of a client’s protected Tax-Free Cash/PCLS entitlement. The second part of the calculation is where the value of the policy as at 5 April 2006 is effectively discounted back by the reduction in the LTA between the date benefits are paid and the LTA of £1.5m that was in place at A-day. If the client is looking to take their protected tax free cash before 6 April 2016, the calculation should be looked at to see if it would be more beneficial for them to wait until the new tax year.

We hope this edition has provided some food for thought to either contact clients before the end of the tax year or created some points that could be discussed with your clients at your review meetings already booked in. For further information on the content of this document please feel free to contact the technical team on technical@sanlam.co.uk where we will try and assist with your query.


[1] It is also the last tax year in which the annual allowance from 2012/13 can be carried forward.
[2] Salary sacrifice cannot be used to reduce the income below £150,000 and it is the total amount of taxable income, less certain reliefs and allowances which is used to calculate the adjusted income.

February 2016

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at February 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.
 
Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.