‘Top 5’ List of Tax Planning Areas
Making sure you use up any allowances you are entitled to is the first step to reducing the amount of tax you may be liable to pay.We’ve provided our ‘Top 5’ list of planning areas to consider before 5 April 2020, the end of the 2019/20 tax year. The rates given are correct for the 2019/20 tax year.
- YOUR ISA ALLOWANCE: DON’T WAIT TO USE IT
There are many different types of Individual Savings Account (ISA), including Lifetime ISAs, Junior ISAs and Innovative Finance ISAs, although the best known are Cash ISAs and Stocks & Shares ISAs.
If you invest your full allowance early on during each tax year rather than at the end, your money will have a longer time to potentially grow tax-efficiently. This can add up to extra money in your ISA if you invest the maximum £20,000 allowance. Of course, not everyone will be in a position to invest £20,000 every April – but the more you put in, and the earlier you do it, the better off you can be.
- TOP UP YOUR PENSION, BUT WATCH OUT FOR THE ANNUAL ALLOWANCE & LIFETIME ALLOWANCE
Generally, the maximum gross amount that can be contributed into a pension each tax year without incurring an annual allowance tax charge is £40,000. However, this is not the case for everyone and it is important you seek professional advice in this complicated area. For personal pension contributions, to receive tax relief, your gross personal contributions must not exceed the greater of £3,600 or your relevant UK earnings.
The lifetime allowance for most people is £1,055,000 in the tax year 2019/20. The lifetime allowance is a threshold that applies to the total crystallised value of all the pensions you have, including the crystallised value of pensions through any defined benefit schemes you are a member of, but excluding your State Pension. If you take any excess amount above the lifetime allowance as a lump sum, you will suffer a lifetime allowance tax charge at 55% (or a lifetime allowance tax charge at 25% if taken as income or placed into drawdown).
- MAKE USE OF GIFT ALLOWANCES
If you have a potential Inheritance Tax liability, there are ways of reducing this by making exempt gifts that are immediately outside of your estate. You can give up to £250 a year to as many people as you like. You can also give away up to £3,000 tax-free a year (this would include the £250 allowance). If you don’t use the £3,000 annual exemption, it can be carried over to the following year, but only up to a maximum of £6,000. Gifts made at the time of a wedding or registered civil partnership are given tax-free allowances: £5,000 can be given to a child; £2,500 can be given to a grandchild or great grandchild; £1,000 can be given to anyone.
If you can prove that regular gifts were funded out of surplus income, not savings, you won’t pay Inheritance Tax on these gifts. But it’s a complicated matter to prove, and on your death your personal representatives will need to provide evidence of your income and outgoings to demonstrate that the gifts were paid for out of surplus income, not from savings or investments.
- THE PERSONAL ALLOWANCE: HOW NOT TO LOSE IT
Unless you are a high earner, you will be entitled to a basic personal tax-free allowance. This is an amount of income you can receive tax-free each year. The current personal allowance is £12,500 and this should be taken into account when calculating your tax bill for the 2019/20 tax year. If you earn over £100,000, this will be tapered by £1 for every £2 over the £100,000 threshold.
If you are married and have used up your personal allowance, but your partner has not, it may be beneficial to transfer some savings or other assets into their name, but you need to bear in mind they will then legally own those assets. Or you can make use of the Marriage Allowance, which allows 10% of a non-taxpayer’s personal allowance to be transferred to their basic-rate taxpaying spouse.
- DON’T FORGET CAPITAL GAINS
The annual exemption is £12,000 for the 2019/20 tax year. If you have unrealised gains, you may decide to dispose of some before the end of the tax year to use up your annual exemption. Married couples are taxed individually on capital gains, so transferring an asset from one spouse to another before realising a gain can be tax-efficient as long as the transfer represents a genuine gift from one to the other. As far as possible, it is important to use the annual exemption each tax year because, if unused, it cannot be carried forward.
When you sell a property that qualifies for the main residence tax relief, you do not have to pay Capital Gains Tax (CGT) on it. This main residence relief is extended for 18 months after you vacate the property. What this means is that you can potentially sell your family home within a year-and-a-half of moving out of it and still qualify for the main residence relief (that is, pay no CGT).
MINIMISE THE AMOUNT YOU PAY IN TAXES, NOW AND IN THE FUTURE
The goal of tax planning is to arrange your financial affairs to legitimately minimise the amount that you or your family will pay in taxes, now and in the future. Although it shouldn’t drive your overall financial planning strategy, it’s a key part of the process. We can help you decide what’s right for you. To find out more, please contact us.
Who are Vizion Wealth?
Our approach to financial planning is simple, our clients are our number one priority and we ensure all our advice, strategies and services are tailored to the specific individual to best meet their longer term financial goals and aspirations. We understand that everyone is unique. We understand that wealth means different things to different people and each client will require a different strategy to build wealth, use and enjoy it during their lifetimes and to protect it for family and loved ones in the future.
All of us at Vizion Wealth are committed to our client’s financial success and would like to have an opportunity to review your individual wealth goals. To find out more, get in touch with us – we very much look forward to hearing from you.
DISCLAIMER:
A PENSION IS A LONG-TERM INVESTMENT.
THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.
PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.
ANYLEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
“The information contained in this article is intended solely for information purposes only and does not constitute advice. While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article”.
Source data:
[1] Royal London Policy Paper 33 – ‘Are half a million people paying unnecessary tax on their state pension?’ is available from www.royallondon. com/policy-papers. The analysis is based on the Family Resources Survey for 2016/17, which is a representative sample of nearly 20,000 households from across the United Kingdom.
