Year end tax planning and Budget changes
Mar 06, 2020
With only a month until the start of a new tax year, and Budget changes on the horizon, make sure you’ve considered all the options for year end tax planning. It’s nearly 18 months since our last Budget, and in the meantime we will have had three different chancellors following the unexpected resignation of Sajid Javid. The early years of a new Parliament are a good time to make radical changes, and many people are predicting significant tax announcements on 11 March.
Rather than increasing headline tax rates, it is understood that the Government is considering the abolition or restriction of many of the tax reliefs which we have got used to relying on. This would still have the effect of increasing tax revenue, but it’s likely that the changes will have more impact on those who are better off.
Inheritance tax in the spotlight
As mentioned in a previous article, we are expecting major changes to inheritance tax (IHT) in the March Budget following two reviews by the Office of Tax Simplification (OTS) and also a report by an All Party Parliamentary Committee. IHT is perceived as a complicated tax with numerous fairly trivial reliefs and exemptions. Currently the tax only generally applies to transfers on death and gifts within 7 years of death. The All Party Parliamentary Committee suggested that there should be a 10% charge on gifts during someone’s lifetime after an annual exemption (suggested £30,000) has been exceeded.
A more radical suggestion was the abolition of Business Property Relief (BPR) and Agricultural Property Relief which currently allow a family business or farm to be passed on without paying IHT. The OTS also recommended a review of BPR so it may be worth considering bringing forward the transfer of all, or part of, the family businesses.
More routine IHT year end planning would be to make use of the current £3,000 annual allowance. Gifts up to £3,000 each year are exempt from IHT. If you haven’t used your £3,000 allowance from 2018/19 you can make gifts of up to £6,000 before 6 April 2020 without the gift being liable to IHT. You could also consider making regular gifts out of your income to minimise the growth of your estate that will be liable to IHT. Gifts out of your surplus income are not subject to IHT if properly structured, and we can help you with keeping the necessary documentation.
Further changes to entrepreneurs’ relief?
Another tax relief which may be further restricted or even abolished is Capital Gains Tax (CGT) entrepreneurs’ relief. This relief allows business owners to pay just 10% CGT on the first £10 million of capital gains when they dispose of their business.
When first introduced, the relief only applied to the first £2 million of gains, but it has been increased twice since 2008 to the current lifetime limit. It may well be restricted once more in the March Budget.
Year end CGT planning
Have you used all of your £12,000 annual capital gains exemption for 2019/20? If your gain is less than £12,000 it may be worth considering selling your shares before the tax year end.
Also, if you have any worthless shares, you might want to consider making a negligible value claim in order to establish a capital loss. Under certain circumstances you may even be able to set off that capital loss against your income, which could save you tax of up to 45% of the loss.
For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on your earnings. This limit covers both your own contributions and those made by your employer.
Note that the unused allowance for a particular tax year may be carried forward for three years and can be added to the relief for the current year, but after this it then lapses if it’s unused. Hence the unused pension allowance for 2016/17 will lapse on 5 April 2020. Under the current rules the net after-tax cost of saving £10,000 in a personal pension for a higher rate taxpayer is only £6,000.
Will pension tax relief change in the Budget?
There are frequent rumours that pension tax relief will change in the Budget. This is even more likely this year as the new Government looks for additional tax revenue to fund its ambitious spending pledges such as the HS2 rail link.
There is speculation that the restriction for those with income over £150,000 may be removed, but at the same time higher rate tax relief may also be removed. One suggestion is that the tax relief may be ‘simplified’ by limiting relief to say 25% or 30%. This means that the government would increase a £750 pension saving to £1,000, but with no further tax relief.
So if you have surplus cash you might wish to consider maximising your pension relief before the tax year end.
Have you used your 2019/20 ISA allowance?
Your maximum annual investment in ISAs for 2019/20 is £20,000, and your investment needs to be made before 6 April 2020. Don’t forget you could also think about investing for your children or grandchildren by setting up a Junior ISA. In the 2019/20 tax year, you can invest up to £4,368 into a Junior ISA for any child under 18.
Don’t lose your personal allowance!
For every £2 that your adjusted net income exceeds £100,000, the £12,500 personal allowance is reduced by £1. Pension contributions and Gift Aid can help to reduce adjusted net income and save tax at an effective rate of 60%.
The restriction applies between £100,000 and £125,000 of your adjusted net income. Another way that you could avoid this trap would be to agree with your employer to sacrifice some of your salary in exchange for a tax-free benefit in kind such as an additional pension contribution.
Consider other tax efficient investments
If you are looking for investment opportunities, have you considered the Enterprise Investment Scheme (EIS)? These are investments in certain qualifying companies which allow you to off-set 30% of the amount invested against your tax bill, as well as the ability to defer CGT until the shares are sold.
An even more generous tax break is available for investment in a qualifying Seed EIS company, where 50% income tax relief is available. It’s also possible to obtain relief against your 2019/20 capital gains. However shares in EIS and Seed EIS companies are risky investments and you should seek specialist advice before investing.
30% income tax relief is also available by investing in a Venture Capital Trust or by investing in a qualifying Social Enterprise.
Buy new equipment before 6 April?
It is your business year end, and not 5 April, which is relevant for capital allowances purposes. If, however, you are running a business and making up accounts to 31 March or 5 April then you should consider buying plant and machinery to take advantage of the £1 million Annual Investment Allowance (AIA).
The AIA provides a 100% tax write-off for equipment used in your business. This tax relief extends to fixtures and fittings within business premises such as electrical, water and heating systems. AIA does not apply to motor cars, but there is a special 100% tax relief if you buy a new car that emits no more than 50g CO2 per kilometre.
Be aware that although most tax changes are likely come into effect from 6 April 2020, there is always the risk that some may be enacted straight away following the Budget announcement on 11 March 2020. If you have any queries about your tax planning before the Budget or the year end then please be sure to get in touch with the team at PT.