Year end tax planning checklist 2015/2016

Transcription

1 Year end tax planning checklist 2015/2016 At Heartwood we make every effort to advise clients on sensible and appropriate ways to reduce their tax burden in a straight forward manner. To complement this advice, and in anticipation of the end of the 2015/16 tax year, the Tax Team have put together a checklist for those clients who would like to assess their tax position prior to 5 April 2016 and discuss any appropriate action with us. Given the ongoing complexity of the UK s tax environment, we would stress the importance of obtaining clear and sensible advice in order to maximise the overall efficiency of your financial affairs. Income tax planning Deferring income to 2016/ /17 Dividend tax rates Under current rules, basic rate taxpayers do not pay income tax on dividend income to the extent this falls within their basic rate tax band. These rules will change from 6th April 2016 so that for all taxpayers the first 5,000 of dividend income will be tax free. However, basic rate taxpayers will then pay 7.5% income tax on dividends received in excess of 5,000, higher rate taxpayers will pay 32.5% and additional rate taxpayers will pay 38.1%. There will no longer be a notional 10% tax credit to offset against these liabilities. Where dividends are expected to be 5,000 or less then no action may be required. However, where dividends form the majority of your income it could be more tax efficient for certain individuals, for example, business owners to take them ahead of the next tax year before the new tax rates take effect. Remember - if you have an investment portfolio with Heartwood, speak with your Client Director to see whether your dividend yield can be increased or decreased in order to maximise tax efficiency after 6th April. Of course, in some circumstances, it may be tax efficient to defer income to the next tax year. For example, where total taxable income falls between 100,000 and 121,200 the personal allowance is gradually reduced. The effect of this reduction is to create an effective marginal tax rate of up to 60% on income falling between these levels. If you believe you may be in this position, there are a number of steps you may be able to take in order to mitigate your tax exposure: Business owners who remunerate themselves by way of dividends could consider deferring a dividend payment to after 5th April in circumstances where they expect their income to be lower in 2016/17 than in 2015/16 such that they would be able to keep their income below 100,000. Indeed, even if deferral does not result in the individual avoiding the 60% marginal rate of income tax, deferring income even by a few days could have the effect of deferring the tax liability arising by nearly 22 months. Unincorporated business owners who anticipate being subject to higher marginal rates in 2016/17 should consider whether it would be possible (or appropriate) to bring forward income into 2015/16 or to delay expenditure to 2016/17. No.1 Kingsway, London, WC2B 6AN. Tel: Mount Ephraim, Tunbridge Wells, Kent TN4 8BS. Tel: handelsbanken.co.uk Heartwood is a trading name of Heartwood Wealth Management Ltd which is authorised and regulated by the Financial Conduct Authority in the conduct of investment business, and is a wholly-owned subsidiary of Svenska Handelsbanken AB (publ). Registered Head Office: London address above. Registered in England Number:

2 If you are employed, consider agreeing with your employer that you will receive a bonus after 6th April or, if possible, exercise share options after this date. You may also wish to consider making a pension contribution where appropriate to reduce your marginal rate of taxation. To avoid large PAYE underpayments occurring if you are employed, remember to check your 2016/17 tax code to ensure that the allowances and restrictions are reasonable. Tell HMRC (or your tax adviser) as soon as possible if you think your tax code is wrong. Spouses and civil partners If your spouse or civil partner pays tax at lower rates than you, consider whether any income can be transferred to them prior to the end of the tax year. For example, it may be possible to transfer a bank account, unconditionally, into your spouse s name prior to the interest payment date if this falls before the end of the tax year. If you have children it may be possible to switch income from one spouse to another in this way so that the income of both spouses remains below the 50,000 threshold for the High Income Child Benefit Charge. High Income Child Benefit Charge (HICBC) If you, your spouse or civil partner, or common law partner received Child Benefit during 2015/16 and either of you had an income in excess of 50,000 then the higher earner may be liable to pay the HICBC. Where that person s income exceeds 60,000 then all of the Child Benefit received may be repayable through Self- Assessment. Check whether you or your partner is liable to pay the HICBC and include it in the appropriate 2015/16 tax return. Remember - it is possible to de-register for Child Benefit. If you do this before 6th April it may spare the need to submit a 2016/17 tax return next year. Pensions The lifetime allowance The lifetime allowance is reducing from 1.25 million to 1 million from 6 April This lifetime limit on the value of pension savings follows previous reductions in 2012 and 2014 and as before, those individuals who may be affected have the opportunity to protect some or all of their pension savings. Fixed Protection 2016 Fixed Protection 2016 will protect the individual s lifetime allowance at 1.25 million, regardless of the current value of pension savings. As with fixed protection 2012 and 2014, this will only be available if no further pension contributions (or accrual under a defined benefits scheme) are made after 6 April Individual Protection 2016 Individuals with pension savings worth more than 1 million on 5 April 2016 will be able to protect the value up to 1.25 million. Unlike fixed protection 2016, individual protection 2016 is not invalidated if further contributions are paid after 6 April A valuation of the individual s total pension entitlement at 5 April 2016 will be required in order to determine the level of lifetime allowance that can be protected. There will be no deadline for applying for fixed or individual protection This will be available on the HMRC website from July 2016 and individuals will need to have registered before taking benefits if they wish to use either type of protection. Individual Protection 2014 Individual protection 2014 is still available to individuals whose pension savings were valued between 1.25 million and 1.5 million as at 5 April Unlike fixed protection 2014, individual protection 2014 is not invalidated if further contributions are paid after 6 April The deadline for applying for individual protection 2014 is 5 April A valuation of the individual s total pension entitlement at 5 April 2014 will be required in order to determine the level of lifetime allowance that can be protected. Remember - if you are affected by this latest reduction in the lifetime allowance, either now or potentially in the future, then you should consider whether applying for one of these types of protection may be appropriate for you. The Annual Allowance The annual allowance on pension savings is currently 40,000 per annum. This is the annual limit on your pension savings without incurring an income tax charge. However due to changes introduced by the government in July 2015 to align pension savings with the tax year, it may be possible to contribute up to 80,000 in the 2015/16 tax year. The Tapered Annual Allowance The annual allowance on pension savings is reducing from 6 April 2016 for individuals with total income exceeding 150,000 per annum (this includes income from all sources such as salary, dividends, rental income and employer pension contributions). The annual allowance of 40,000 will reduce by 1 for every 2 of income above 150,000, subject to a minimum of 10,000. This means that for those with income exceeding 210,000 per annum, their annual allowance will be reduced to the minimum of 10,000 per annum. Carry forward of unused relief Where the individual does not use some or all of their annual allowance for a particular tax year, this unused relief can be 2

3 carried forward up to three years. This unused relief can only be carried forward once the full annual allowance for the current tax year has been used. This valuable facility enables individuals to make larger contributions than that permitted under the current year s allowance. Consider maximising your pension contributions where possible, particularly if your income exceeds 150,000 and your annual allowance will reduce from 6 April Tax efficient investments ISAs For 2015/16 the overall investment limit is 15,240. You may invest in any combination of cash or stocks and shares, provided that the amount invested does not exceed 15,240. There are several tax benefits attached to ISA s: Dividend and interest income is earned tax free. Where investments are sold within a stocks and shares ISA any capital gains realised are tax free and do not use up your CGT annual exemption. If your spouse or civil partner dies and you inherit their ISA, it will not lose its status and you may continue to enjoy the tax free benefits irrespective of its size. From 6th April 2016 it will be possible to withdraw funds from your ISA and replace them at a later date without the replacement funds counting towards your ISA investment limit for the year, thus increasing the flexibility of ISAs as a savings vehicle. It is possible to transfer your existing ISA from one provider to another without it losing its tax free status. Heartwood offers a stocks and shares ISA that can be accessed in two ways: 1. Without advice. For those customers who are comfortable with making their own investment decisions Self Select provides an opportunity to access Heartwood s investment solutions on an execution only basis. Self Select enables customers to transfer existing investment / ISA portfolio s or just simply use this year s allowance in an investment environment. A Handelsbanken bank account is required to take advantage of this service. 2. With advice. Making investment decisions is not for everyone and for customers who are not comfortable doing so then a Heartwood Client Director is on hand providing wide-ranging, carefully researched advice. Remember - maximise your ISA allowance before the end of the tax year - it will be lost if you do not do so. EIS & VCTs Sophisticated investors with a higher appetite for risk could consider subscribing for shares in a Venture Capital Trust (VCT), under the Enterprise Investment Scheme (EIS), or Seed Enterprise Investment Scheme (SEIS). Income tax relief is available at a flat rate of 30% for investments in VCTs of up to 200,000 and any dividends received by investors are usually tax free. Investors can claim income tax relief of 30% on investments in EIS qualifying shares up to a maximum investment of 1,000,000. It is possible to carry back income tax relief to the previous tax year in respect of EIS investments so if you subscribe for EIS shares after 6th April then action can still be taken to reduce your income tax burden for 2015/16. Where a company qualifies under the Seed Enterprise Investment Scheme (SEIS), income tax relief is given at a rate of 50% subject to an overall investment limit of 100,000. Like the EIS, the amount invested can be treated as made in the previous tax year. Social investment tax relief (SITR) The social investment tax relief (scheme) is designed to support social enterprises seeking external finance by offering income tax reliefs to investors who invest in new shares or qualifying debt investments. Income tax relief is available at a flat rate of 30% of the amount invested up to a maximum investment of 1,000,000 during 2015/16. All or part of an investment made in one tax year may be treated as made in the previous tax year. Remember -VCT, EIS, SEIS and SITR investments are not suitable for everyone and are not regulated by the Financial Conduct Authority. Appropriate investment advice should be obtained before making any decision to invest. Tax considerations should not be the sole driver for investment decisions. Other areas to consider Charitable Giving Gift Aid Cash donations can be made to charity under the gift aid scheme. The charity will reclaim basic rate income tax directly from HMRC and additional tax relief of either 20% or 25% can be claimed through your tax return depending on whether you are a 40% or 45% taxpayer. If it is tax efficient to do so, gift aid donations made in 2016/17 tax year can be treated as paid in 2015/16 in certain circumstances. This carry-back facility might be particularly useful where a taxpayer finds that their income falls between 100,000 and 121,200 in 2015/16. This is because gift aid donations also act to reduce taxable 3

4 income and may have the effect of reinstating some or all of your reduced personal allowance. Charitable Giving Quoted Securities If you hold quoted shares or securities, consider whether it would be more tax efficient to make a gift of these to charity before the end of the tax year. Such assets can often be gifted free of CGT and an amount equal to the open market value of the investment gifted to charity can be claimed as a deduction against your total taxable income for the year. Rental income Profits from rental businesses are subject to income tax at your marginal rate. Expenses incurred wholly and exclusively in connection with the rental business may generally be deducted unless they are capital in nature. At the end of the tax year it is good practice to review your records to ensure you are able to evidence property expenditure for tax purposes. From 6th April the 10% wear & tear allowance will be abolished. Where you own a furnished rental property, consider deferring expenditure on furnishings until 2016/17 and claiming tax relief on the actual costs of the renewals. If you are thinking about purchasing a buy-to-let property, consider bringing forward completion of the purchase. If contracts were exchanged after 25 November 2015 then the higher rates will apply if the purchase is completed on or after 1 April After this date, an additional 3% to Stamp Duty Land Tax will be payable on second properties. However, if contracts were exchanged on or before 25 November 2015, but not completed on or after 1 April 2016, the higher rates will not apply. Remember - from April 2017, buy-to-let landlords of residential properties will begin to see the phased reduction of tax relief on their finance costs thus significantly increasing the income tax burdens of many. Some landlords may ultimately find it uneconomical to retain their portfolios, particularly in circumstances where portfolios are highly geared. From a tax perspective, there is no one-size-fits-all solution to this problem. Selling part of the portfolio in order to pay down mortgage debt may be a difficult decision - but the most pragmatic step to take. Exploring the possibility of purchasing new buy-to let properties through companies, and analysing the tax costs of transferring existing properties to companies could also be considered. Capital Gains Tax (CGT) Planning Most taxpayers are entitled to a CGT annual exemption of 11,100 for 2015/16. It cannot be carried forward or transferred. If you do not use your CGT annual exemption before the end of the tax year, it will be lost. In order to make use of your CGT annual exemption, you might consider selling investments held in your name and purchasing them back via your pension, ISA or in your spouse s / civil partner s name. This type of planning allows you to utilise your annual exemption (or to create a capital loss) and can facilitate the transfer of investments to a tax sheltered environment. If your spouse has capital losses available, assets standing at a capital gain in your name could be transferred into their name before arranging for them to be sold before the end of the tax year. If you have separated from your spouse or civil partner assets transferred to them before the end of the tax year of separation will be treated as passing on a no gain no loss basis. Assets transferred after the end of the tax year will generally be chargeable to CGT. As with income tax planning timing can be key. Consider whether a capital gain can be deferred until after 5th April in order to postpone the payment of the tax. This strategy could also be appropriate where you expect to have an unused basic rate tax band in 2016/17 so that, depending on the level of capital gains, they will be taxed at 18% and not 28%. Alternatively it may be possible to realise part of the capital gain prior to the end of the tax year and another part early in the next tax year so as to make use of two CGT annual exemptions back to back. Remember - the trigger date for capital gains is the date when a contract becomes unconditional so, in the case of selling an investment property, it is the date of exchange that counts for these purposes - not the date of completion. CGT Reliefs If you have recently acquired a second home in the UK, then it may be beneficial to make an election to ensure that CGT on your second home, if it is used as a main residence, qualifies for appropriate CGT relief on sale. Time limits apply so it is important to review your main residence position for tax purposes along with your other capital gains tax affairs. Entrepreneurs Relief is available when an individual sells their business or shares in their personal company. The rate of CGT is 10% on qualifying capital gains realised up to 10 million. We can advise whether you would qualify for entrepreneurs relief at present or whether your interests could be restructured so that a future disposal could attract a more favourable rate of CGT. Remember - if you subscribe for shares under the EIS scheme, you may defer one pound of capital gain for every pound you invest. Capital gains arising in the 12 months prior to the date of EIS subscription and 36 months after may be deferred in this way. If you subscribe for shares under the SEIS (and claim income tax relief on the investment) then you may permanently exempt 50p of capital gains for every pound you invest in the SEIS. Capital gains arising in the year of SEIS subscription or in the previous tax year may be exempted in this way. Time limits apply to claims for tax relief so double check your records to ensure that all have been claimed. 4

5 Inheritance Tax (IHT) Sensible IHT planning starts with doing the easy things, such as making use of your exemptions, as a matter of routine: Where possible, remember to use your 3,000 annual exemption before the end of the tax year. Any unused amount can be carried forward for one year only, which means that if you have any remaining allowance carried forward from 2014/15 it will be lost after 5th April. Make use of other IHT reliefs and exemptions, such as the small gifts exemption of 250 per donee, and gifts made in consideration of marriage ( 5,000 to children, 2,500 to grandchildren and 1,000 to anyone else). Gifts to mainstream political parties are also exempt from IHT. Making larger lifetime gifts is not dependent on year-end tax planning; but you might consider whether it is appropriate to make lifetime gifts in order to reduce your estate for IHT purposes. Broadly, gifts to individuals are treated as potentially exempt transfers (PET s) and are not subject to UK IHT if the donor survives for 7 years from the date of the gift. You might also consider whether there are opportunities to make use of the normal expenditure out of income exemption which allows individuals to give away income of any amount free of IHT provided that certain criteria are met. Although not dependent on the end of the tax year, we would generally recommend that you review your Will at least every 5 years to ensure it meets your requirements. You might consider reviewing the content of your will as part of your year-end tax planning. Remember - if a family member has died within the last two years, check whether a deed of variation could reduce any IHT liability on their estate, or direct assets to where they are most needed. All beneficiaries to the estate must agree to the variation. Non-Domiciliaries (non-doms) The tax rules relating to non-doms are very complex and we cannot stress enough the importance of obtaining tax advice if they affect you. That said, the following are basic areas you should pay close attention to as we approach the end of the tax year; your offshore income and capital gains, UK income and gains, and the availability of any foreign tax credits. Take care not to remit nominated income and gains into the UK as this could trigger the application of complex ordering rules for other remittances and increase your UK tax liability on them. Check whether you can take advantage of Business Investment Relief (BIR). Where your remitted offshore funds are used for commercial investment in unquoted UK trading companies then the underlying income or capital gains will not be charged to tax once brought onshore. Relief is unlimited and the range or permissible trading activities that the company may undertake is wider than those stipulated under the EIS or SEIS, although BIR may also be given for direct investment in EIS or SEIS companies. If you are approaching one of the key tax residence thresholds, such as being resident in the UK for 17 out of the last 20 years, you should seek tax advice about how to mitigate your exposure to UK IHT. Other key dates are being UK resident for more than 7 years and then more than 12 years we can advise you of the income tax and CGT implications. Remember from 6th April 2017 the taxation of non-doms will fundamentally change. Government proposals currently include: Non-doms will be deemed domiciled for all tax purposes once UK resident for more than 15 out of the last 20 tax years and will be taxed on their worldwide income and capital gains on an arising basis. Deemed domicile for IHT will be aligned with the new 15 year rule for income tax and CGT. We can assist non-doms in all aspects of UK tax planning. The Budget The next Budget is scheduled to take place on Wednesday 16th March History suggests that tax is likely to be high on the agenda and Heartwood plans to issue a client information note on the impact of the announcements as soon as possible after the Budget. (Please see overleaf for risk warnings and important information). If you are not UK domiciled, check whether your offshore funds are clearly segregated so that it is clear which particular category of clean capital, income or capital gains are brought into the UK. In order to anticipate your forthcoming tax liabilities, seek advice about whether it may be more tax efficient for you to be taxed on the arising basis for 2015/16 or the remittance basis. This will depend upon the level of 5

6 Risk Warnings Heartwood is a trading name of Heartwood Wealth Management Limited ( Heartwood ), which is authorised and regulated by the Financial Conduct Authority (FCA) in the conduct of investment business and is a wholly-owned subsidiary of Svenska Handelsbanken AB (publ). Tax advice which does not contain any investment element is not regulated by the FCA. This document has been prepared by Heartwood for clients and/or potential clients who may have an interest in its services. The provision of this information does not constitute tax, pensions or investment advice. Tax rates and legislation are subject to change. We cannot guarantee to inform you of any such changes and Heartwood accepts no responsibility for any inaccuracies or errors. Any levels of taxation referred to depend on individual circumstances and the value of tax reliefs are those which apply at 1 March The value of the pension received when taking benefits from a pension will depend on various factors including, but not limited to, contributions made, charges and fees, tax treatments, annuity rates, investment performance. Professional advice should be taken before any course of action is pursued. This does not constitute any recommendation to buy, sell or otherwise trade in any of the investments mentioned. The value of any investment and the income from it is not guaranteed and can fall as well as rise, so that you may not realise the amount originally invested. Heartwood cannot accept responsibility for the consequence of any action taken or failure to take action by a reader on the basis of the information provided. When Heartwood provides advice in relation to investment, its own investment management services will usually be recommended. When advice on pensions or other products outside an investment management relationship is required, Heartwood will recommend products chosen from a limited selection of providers that have been appointed on the basis of its judgement in their quality of service, investor protection, financial strength and, if relevant, their financial performance. As a result, any advice given by Heartwood in respect of retail investment products will be restricted as defined under the FCA rules. 6