Tax Planning suggestions before 5th April 2015

Pensions 

• During 2014/15 you can pay up to £40,000 gross into a pension plan (provided you have sufficient earnings). To the extent that you have not used up your contribution limit (£50,000 pa for 2011/12 to 2013/14) in any of the three previous tax years, you may be able to increase the contributions in 2014/15 beyond £40,000 to a maximum of £190,000. It is however necessary to have an existing pension plan before unused relief for an earlier year can be used.
• Even if you have no earnings you may still contribute up to £3,600 gross into a pension plan either for yourself or for any of your children.
• The lifetime pension allowance is now £1.25million.
• Restrictions on how much a member aged at least 55 can withdraw from his pension fund, cease with effect from 6^th April 2015. Withdrawals in excess of the 25% tax free amount will be subject to the member’s marginal rate of tax. Members considering significant withdrawals should consider carefully the income tax consequences and the timing of so doing.

ISAs 

• ISAs provide an environment in which income and gains from investments are tax free. The annual amount which you can now invest in an ISA is £15,000, whether in cash, stocks and shares or a mixture of the two. There are also Junior ISA’s available to certain minors. If you have not used up the allowance of £4,000 for a minor for 2014/15, you could make payments up to these limits, either side of 5^th April.

IHT Planning

• You can give away £3,000 each year completely exempt from Inheritance Tax with no requirement to survive 7 years. If you did not make a gift in 2013/14, you can gift £6,000 in 2014/15.
• To the extent that your annual income after tax exceeds your annual expenditure, you can make regular gifts out of income which should be exempt from Inheritance Tax provided they do not affect your standard of living. This can be a very efficient way of IHT planning in suitable cases.
• Straightforward gifts, with no strings attached and no reservation of benefit, are a simple and effective way of passing wealth on to another generation, provided the donor survives 7 years.
• Simply buying shares in an EIS company and holding them for two years is a way of reducing potential exposure to IHT as these assets would then not be subject to IHT because of Business Property Relief. This must however be balanced with the increased risk which is normally associated with EIS shares.

 Capital Gains Tax

• Realising gains of up to the annual exemption (£11,000 for the tax year 2014/15) is simple and tax efficient. If you have already sold shares realising a gain in excess of the annual exemption, consider selling others standing at a loss to offset against the gains but do not buy the same shares back within 30 days. For married couples the 30 day anti-avoidance rule which matches the new purchase with the sale, does not apply to a new purchase by your spouse; so this offers an opportunity to a couple who want to realise a loss but retain the shares between them.
• Gains made on a sale of your main residence are generally totally exempt from capital gains tax unless there is a period when you were living elsewhere. Even if you lived elsewhere during the last 18 months of your ownership, that period will be an exempt period.
• Non-UK residents have until now generally been outside the scope of capital gains tax. Due to recent changes, disposals of UK residential property after 5^th April 2015 by a Non-UK resident will become subject to Capital Gains Tax. Any chargeable gains will be calculated by comparing disposal proceeds with the value at 5^th April 2015 or alternatively using a time apportionment method. These new rules apply whether the owner is an individual, a partnership, a company or a trust. Non-UK residents owning UK property might consider having their properties professionally valued at 5^th April 2015.
• A capital gain may be deferred by subscribing for shares in an EIS or Seed EIS company with the 12 months before and three years after the gain was realised. The gain will crystallise only when the EIS shares are disposed of.
• Normally where capital losses arise in a subsequent year they cannot be relieved against an earlier year’s gain. However by subscribing for EIS shares in the meantime and subsequently selling the EIS shares, it may be possible to relieve those losses.
• Entrepreneur’s Relief is a generous relief reducing the rate of capital gains tax from 28% to 10% on disposals of businesses or shares in a private trading company held for at least 12 months. It is important to ensure that if shares are to be sold, that the appropriate type and percentage are held.

Income Tax

• Where income levels are close to thresholds at which either the personal allowance may be lost, or your income may become charged at a higher tax rate band, consider:
  • making a pension contribution or gift aid payment
  • transferring income producing assets to your spouse
  • moving to assets which are designed to produce capital gains rather than income.
• Subscribing for shares in an EIS company attracts income tax relief at 30%. This applies to shares costing up to £1,000,000 each year. The corresponding limit for Seed EIS shares is £100,000 but the income tax relief is up to 50%.
• Members of LLPs might want to check that their status for tax purposes has not changed to that of an employee following changes introduced last year. Where a member meets all of the following three conditions, he/she will be treated as an employee and there will be an obligation to deduct PAYE and National Insurance contributions under RTI:
  • At least 80% of the amount paid to the member in a year is “disguised salary”. Disguised salary for this purpose is either:
    •  fixed;
    • variable but without reference to profits/losses or
    • not in practice affected by overall profits or losses of the LLP
  • The member does not have significant influence over the LLP’s affairs
  • The member has contributed as capital to the LLP less than 25% of his disguised salary.
• HMRC are likely to apply penalties if a member who meets all three conditions, continues to be paid gross after 5th April 2014. In appropriate cases it may be worth considering altering the member’s arrangements with the LLP.
• Individuals wishing to become not resident in the UK should consider leaving before 5th April
• Individuals who are concerned about their residence status, whether for income tax, capital gains tax or inheritance tax, should consider the rules under the Statutory Residence Test.
• A loan from your employer is exempt from the beneficial loan charge provided it does not exceed £10,000.
• For those who are charitably minded, a gift of quoted shares standing at a gain can be particularly tax efficient with: a gross deduction against income for the value of the shares, exemption from CGT and removal of value from estate for IHT purposes. Quoted shares worth £10,000 given by a 45% taxpayer may reduce his income tax liability by £4,500, avoid capital gains tax and immediately reduce their estate for Inheritance Tax purposes.
• Gift Aid is also attractive to a higher rate taxpayer. A net cash gift of £8,000 will be worth £10,000 to the charity (as it claims a tax refund of £2,000 from HMRC) and a 45% taxpayer will be able to reduce his tax liability by £2,500, so that the net cost to him is only £5,500. It may be possible, with careful timing, to elect to treat a gift aid payment as if it had been made in the previous year.
• Single premium life assurance policies. An individual who is seeking to increase his income may increase withdrawals above 5% without incurring an income tax charge to the extent that the chargeable event gain does not take his taxable income beyond the basic rate band. Also if likely to become a higher rate taxpayer after 5^th April 2015, consider drawing in excess of 5% now.
• HM Revenue and Customs no longer send us copies of PAYE coding notices. Those we do receive often contain significant errors in the codes which, unless corrected, can result in some clients having unexpected underpayments after the end of the year. In order that we may check that the correct amount of PAYE is being deducted, could you please forward to us coding notices as soon as possible.
• Sole traders might consider inviting their spouses to become partners or employees of the business especially where the spouse is a basic rate taxpayer and can do some work for the business.
• Where shares in an unquoted trading company have been subscribed for and have been sold at a loss, a claim may be made to set the loss against income. If the shares remain unsold but now have little value, a similar result may be achieved by also making a negligible value claim.
• If you are considering investing in significant expenditure eligible for Capital Allowances, it may be worth ensuring that you do so by 31^st December 2015 after which the annual limit the Investment Allowance drops from £500,000 to £25,000.
• Where husband and wife are both non-UK domiciled and subject to the Remittance Basis Charge (RBC), they may be able to arrange their affairs so that only one of them pays the RBC.

We recommend that clients should obtain specific advice before taking any action in respect of the above planning points.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.