Reducing the taxman’s take
To minimise the tax you pay, it’s important to be fully aware of the choices you can make before you make them, so planning ahead and taking professional financial advice is essential. With real-terms tax increases the prospect for the foreseeable future, it makes sense to utilise every available tax relief.
HM Revenue & Customs (HMRC) creates many legitimate opportunities for you to reduce the amount of tax you pay. However, you may not be aware of them all, or you may be unsure of how to take advantage of them.
Here are examples of the ways in which legitimate planning may save you money by reducing your tax bills.
Do you have the correct PAYE tax code?
PAYE tax codes can be incorrect when issued. HMRC may have included an estimate of your unearned income, which means you will pay tax on that income earlier than you would if it was assessed through your self-assessment tax return. You can ask HMRC to remove this estimated income and also correct any other errors. For more information regarding your PAYE tax code, please follow the link provided – https://www.gov.uk/tax-codes
Could you use the new transferable amount of personal allowance?
Since the tax year 2015/16, married couples and registered civil partners can share some of their personal allowance between them. The unused allowance of one partner can be used by the other, meaning an overall tax saving for the couple. The amount you can transfer is capped at £1,250 for tax year 2019/20 (reducing tax up to £250), and a transfer is not permitted if either partner is a higher or additional rate taxpayer. More information can be found here – https://www.gov.uk/marriage-allowance
Are you overpaying National Insurance contributions (NICs)?
If you have more than one job, you may overpay NICs during the tax year. You can then reclaim any overpaid NICs from HMRC after the end of the tax year. However, you could prevent the overpayment in the first place by deferring payment of NICs on one of your jobs by sending HMRC a completed form CA72A. To check your National Insurance record to ensure you have paid enough to qualify for a full State Pension – https://www.gov.uk/check-national-insurance-record
Do you and your new spouse both own separate properties?
If you are getting married or entering into a civil partnership, and you both own separate properties which you continue to occupy for some periods, you need to nominate one of them as your main home within two years of your marriage or registered civil partnership. Once married, you can have only one main home between you for tax purposes. To nominate the one that is likely to make the best use of your Capital Gains Tax (CGT) property exemption, otherwise, HMRC will designate the property that you occupy the most as your main residence.
If you own more than one residential property, have you informed HMRC which of your properties should be treated as your main home for tax purposes?
The property that has always been your main home is free of CGT. Any other property where you have lived for part of the time will attract a tax exemption for the periods you have lived there and have elected for it to be your main home. If a property has been your nominated main home at any time, the gain for the last 18 months of ownership (36 months if moving into care) is free of tax, even if you do not live there during that final period. The position may become even more complicated if you have an overseas property.
Are you paying an extra Child Benefit tax charge?
Child Benefit still continues to be paid to everyone, but if you’re a higher-income family, you’ll have to pay extra tax if you choose to keep getting it. If your income lies between £50,000 and £60,000, the Child Benefit tax charge will be equivalent to 1% of the child benefit for every £100 of income over £50,000. The tax charge applies to the higher earner, irrespective of who claims the benefit. To avoid the tax charge, you could either stop claiming Child Benefit or reduce your income below £50,000. If your income is over £60,000 a year, you will be subject to a tax charge to claw back the full amount of the benefit. Child benefit tax calculator can be found here.
Have you taken advantage of your Individual Savings Account (ISA) allowance?
The maximum annual amount you can save or invest in an ISA is £20,000 (tax year 2019/20) which is free of income and capital gains. You can put the whole amount into a Cash ISA, a Stocks & Shares ISA or any combination of the two. You may also be eligible for a Lifetime ISA if you are saving to buy your first home. The Government will boost your savings by 25%, so, for every £4 you save, you’ll receive a government bonus of £1. The maximum government bonus you can receive is £33,000 if you open this at 18 years old and will be maxed out until you hit 50. Each year you can save up to £4,000 as lump sums or cash when you can. Meaning if you saved £1,000 your Help to Buy ISA will take this up to £1,250 with the bonus. When you are in the process of buying your first home, your solicitor or conveyancer will apply for your government bonus. For more information regarding ISA’s please follow the link provided – https://www.moneysavingexpert.com/isas/
Could you contribute towards a tax-efficient Junior ISA?
During this tax year (2019/20), you are able to contribute up to £4,368 into your child’s Junior ISA (JISA). The fund builds up free of tax on investment income and capital gains until the child reaches 18 and living in the UK, when the funds can either be withdrawn or rolled into an adult tax-efficient ISA. Relatives and friends can also contribute to the child’s Junior ISA, as long as the £4,368 limit is not exceeded. Any child aged under 18 who lives in the UK can have a Junior ISA if they were not entitled to a Child Trust Fund (CTF) account, although a CTF can be switched to a Junior ISA. More information on Junior ISA’s can be found here – https://www.gov.uk/junior-individual-savings-accounts
Will your ISA balance pass to your spouse or registered civil partner on your death?
For deaths on or after 3 December 2014, a surviving spouse can increase their tax-exempt ISA savings by the value of the deceased partner’s ISA balances. Therefore, if your spouse passes away, and the deceased’s ISA is worth £40,000, the surviving partner will not only have the ISA allowance of £20,000 ISA which is open to everyone in the 2019-20 tax year, they’ll also have an additional permitted subscription of £40,000 for inheriting their spouse’s ISA.
Are you planning to leave any of your estates to charity?
By leaving at least 10% of your net estate to charity, after the deduction of the £325,000 nil rate band, this will reduce the IHT rate on your taxable estate from 40% to 36%. The exact calculation of your net estate may be complicated, so it’s important to obtain professional financial advice when drawing up or amending your Will.
Could you make monetary gifts from your capital resources?
If you make gifts totalling £3,000 each tax year from your capital resources, these gifts are free of IHT. In the event that you forget to make your £3,000 gift one year, you can catch up in the next tax year by giving a total of £6,000. Both you and your spouse or registered civil partner can each give £3,000 every tax year in addition to gifts you make out of your regular income.
Could you make use of the IHT marriage exemption for gifts?
If your son or daughter is about to marry or register a civil partnership, then you and your spouse or civil partner can each give them £5,000 in consideration of the marriage, and the gift will be free of IHT. This is in addition to any smaller gifts you make out of your regular income each year. The marriage exemption can also be combined with your £3,000 a year exemption to allow you to make larger exempt gifts. The IHT-free gift you can make on the occasion of a grandchild’s wedding is £2,500, and registered civil partnerships benefit from the same exemptions.
Are you contributing to your employer’s pension contributions to save NICs?
If your employer pays a contribution directly into your pension scheme, they receive tax relief for the contribution and there are no NICs to pay – saving both your employer and your NICs. You could arrange with your employer to cover the cost of the contributions by foregoing part of your salary or bonus.
Could you carry forward any unused annual pension allowances?
You can carry forward unused allowances from the three previous tax years and use these to cover pension contributions greater than the current year’s annual allowance. The carryforward of unused annual allowances will continue to be available when the tapered reduction is introduced, but carry forward in future years will be based on the unused tapered annual allowance.
Will you release capital gains or losses in this tax year?
If you release capital gains and losses in the same tax year, the losses are offset against the gains before the capital gains exempt amount is deducted. So losses will be wasted if gains would otherwise be covered by the exempt amount. It may be appropriate to consider postponing losses until the following tax year or, alternatively, releasing more gains in the current year.
What should you know?
If you own your home on a joint tenancy basis and are married, there will be no tax liability on the first death, because anything left to a spouse or registered civil partner, a charity or a community amateur sports club is not subject to IHT. The same applies when you each own half the home as tenants in common and each of you leaves your share in your Will to the surviving spouse. However, a surviving spouse must be UK domiciled for an unlimited amount to be IHT-free, otherwise, a reduced amount is IHT-free.
But IHT could be a problem once the second spouse or registered civil partner dies, in terms for your children. Under the IHT rules for the 2019/20 tax year, once a chargeable estate is worth more than £325,000, the excess becomes subject to IHT at a flat rate of 40%. For example, if your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
If an IHT bill looks likely, it is more sensible to make some provision to meet it, otherwise, your heirs may be forced to sell the family home or other assets simply to raise enough money to pay the tax bill. A popular solution is the purchase of a whole-of-life insurance policy written in an appropriate trust and designed to pay out when the surviving spouse dies.
Reliefs relating to Inheritance Tax
Inheritance tax (IHT) is payable by some people who, for the most part, could have avoided it. If you want your estate to go to your loved ones with the minimum amount of IHT payable, you should obtain professional advice. There are currently a number of generous reliefs relating to IHT.
Main residence transferable nil-rate band
Main residence transferable nil-rate band (family home allowance) that applies when the main residence is passed on to a direct descendant. The main residence transferable nil-rate band will work alongside the existing IHT nil-rate band which is currently £325,000. In the same way as with the current nil-rate band, any unused main residence transferable nil-rate band will be transferred to a surviving spouse or registered civil partner.
A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify. The allowance will initially be set at £150,000 in 2019/20 and up to £175,000 in 2020/21 (and then increase each year in line with inflation (CPI)).
Inherited from a spouse
It is possible therefore that by 2020/21, an individual will have their own nil-rate band of £325,000 as well as the main residence transferable nil-rate band of £175,000 in respect of their main residence, plus a nil-rate band of £325,000 inherited from their spouse and the main residence transferable nil-rate band of £175,000 inherited from their spouse.
This gives the much-advertised total of £1 million. It is worth noting that the current nil-rate band of £325,000 is now set to remain until 2020/21. There is also going to be a tapered withdrawal of the main residence transferable nil-rate band for estates worth more than £2 million.
Effect of the proposed changes
Few taxes are quite as emotive – or as politicised – as IHT. The structures into which you transfer your assets can have lasting consequences for you and your family. The rate of IHT payable is 40% on property, money and possessions above the nil-rate band. The rate may be reduced to 36% if 10% or more of the estate is left to charity.
It makes sense to ensure that your affairs are structured in the most tax-efficient way possible. However, it isn’t easy to keep up with the many exemptions and reliefs available. So what should you consider?
Lifetime gifts to individuals are potentially exempt transfers and fall outside the scope of IHT, provided the donor survives at least seven years from the date of the gift.
Trusts can sometimes help you to eliminate unnecessary tax charges, enabling the maximum possible part of your family’s wealth to be preserved. You may like to transfer part of your wealth to a family member but still retain control; our specialists can advise on setting up trusts and can take care of all the administration.
One important way to minimise IHT is to make a Will, so as to leave your family with the maximum assets and at the least tax cost.
Business and corporate structures
If you have a business, it is also important to examine the structure of your business when considering your affairs. Changing the structure of a business can have significant tax implications.
Enjoy special concessions
The treatment for IHT purposes is more favourable for some assets than others. Business assets and shares in unquoted companies, agricultural land and works of art, for example, all benefit from special concessions which may assist in passing wealth from one generation to the next.
Making gifts for charitable purposes can be highly effective in potentially reducing an IHT charge on death.
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