Planning gains

Everyone has an annual exemption for Capital Gains Tax (CGT) of £12,000 for 2019/20. This is wasted if you dont make Capital Gains in the tax year. You cant carry forward any unused exemption to a different tax year or transfer the exemption to another person.

If you are planning to dispose of assets which will create Capital Gains, you can save tax if the disposals are spread over several tax years. This is easy to do if your assets can be split into separate chunks, like shares. Each sale can then be calculated to produce a gain of less than £12,000.

If the asset must be sold in one go, you could reinvest part or all of the gain in Enterprise Investment Scheme (EIS) shares, but you must be prepared to take a risk. This will defer the gain until the EIS shares are sold. You can sell sufficient EIS shares in later years, so the gain is covered by your annual exemptions.

When you give a valuable asset to a relative, the disposal is treated like an open market sale, and the deemed gain is taxable. However, gifts to your spouse or civil partner don’t create immediate taxable gains, as the recipient takes over the transfers CGT cost. You can use this transfer between spouses to share the ownership of a property, and hence the gain, and thus use two annual exemptions in one tax year.

Legal advice should always be taken when giving away land or buildings, or a share in such property. Stamp duty land tax (or similar taxes in Scotland or Wales) may be payable if the property is mortgaged.

Action Point!
Are you taking full advantage of the CGT exemption?

 

Making good’ benefits

Where an individual receives a benefit from their employer they can avoid being taxed on it if they make good the value of benefit by reimbursing the employer. There are strict time limits for doing this.

All reimbursements of taxable non pay rolled benefits for 2019/20 must be made by 6 July 2020, which aligns with the date for submitting the forms P11D.

The dates for making good on pay rolled benefits-in-kind provided in 2019/20 are:

  • 1 June 2020 for the value of road fuel used
  • 5 April 2020 for all other benefits

The deadlines for making-good specifically dont apply to interest payable on beneficial loans and overdrawn directors loan accounts. Where such loans exceed £10,000 at any point in the tax year there is a taxable benefit if insufficient interest is paid. This taxable benefit can be avoided if interest at least equal to the official rate is reimbursed, where the borrower is contractually obliged to pay it. The official rate for 2019/20 is 2.5%.

Despite the exclusion for beneficial loans, most people should try to pay any interest due on a loan by the 6 July following the tax year, to avoid any doubt as to whether a benefit arises at the time the P11D form is being prepared.

Action Point!
To avoid a taxable benefit, make the reimbursement within the statutory time limits.

 

Your clear intention

When you die, your executors or relatives need to sort out your affairs. This stressful task can be made easier if you leave a clear and up-to-date Will which has been drafted with tax in mind.

They may also need to pay Inheritance Tax (IHT) if the net value of your assets, including your home and any insurance policies that pay out to your estate on death, exceeds £325,000. The IHT rate above this threshold is 40%, or 36% if at least 10% of your net estate has been left to charity.

The IHT tax threshold is expanded by up to £150,000 if you leave the value of your home to one or more of your direct descendants. If that is your wish, your Will must be clear about who receives the value of your home. This home-related tax exemption will increase to £175,000 for deaths on and after 6 April 2020.

There are other ways to reduce the IHT payable on death, such as:

  • use your annual IHT allowance of £3,000 to make gifts from your capital or savings; if you didn’t use this allowance in 2018/19 you can give away up to £6,000 in 2019/20
  • make other gifts to individuals as early as possible, as they will fall out of the IHT calculation if you survive seven years after the date of the gift (but be careful not to trigger CGT charges on the gifts)
  • make regular gifts out of your surplus income rather than out of accumulated income or capital  those lifetime gifts may escape IHT
  • ensure that proceeds from your life assurance policies flow directly to a beneficiary  if the money lands in your estate on your death, this could trigger an IHT charge
  • inform your pension fund managers of whom you wish to receive any undrawn funds by way of a wishes letter  such funds can be free of IHT if you die aged under 75
Action Point!
Is your Will up to date and do your executors know where to find it?

 

ISA nice idea

You can save for retirement in a number of ways. The traditional route is via a pension scheme, but you could also use an ISA.

Savers aged under 40 can open a Lifetime ISA and contribute up to £4,000 per year, which attracts a 25% bonus from the Government. This bonus is withdrawn if the savings are accessed other than to be used as a deposit for the savers first home, on diagnosis of a terminal illness, or from age 60 onwards.

The Lifetime ISA savings are counted as part of the annual ISA allowance of £20,000 per tax year. This allowance cant be carried over to a future tax year, so you need to use it or lose it.

ISA savings are not taxed when they are withdrawn, but they dont attract tax relief on the way into the account.

Pension scheme savings are taxed when they are withdrawn, with an exception for the first 25% cash lump sum taken. However, contributions into a registered pension fund will attract tax relief at your highest tax rate, subject to the cap imposed by your annual allowance.

This annual allowance is nominally set at £40,000, which covers pension contributions made by you and by your employer on your behalf. Any annual allowance not used can be carried forward for up to three years.

If your income is over £110,000, and adding the pension contributions made by you and your employer takes that total to over £150,000, your annual allowance is reduced by £1 for every £2 over that threshold, down to a minimum of £10,000.

Your annual allowance is also reduced, to exactly £4,000, if you have ever accessed your taxable pension savings built up in a money purchase (defined contribution) pension scheme. This is to prevent you from drawing funds from your pension scheme and then putting significant money into the same or another pension scheme, with additional tax relief.

An unused amount of the £4,000 money purchase annual allowance cant be carried forward to future tax years.

 

Action Point!
Review your pension saving plans before 6 April 2020.

 

Tax-free rent

When you let rooms in your own home as residential accommodation, you can receive the rent tax-free if it falls within the limits for rent-a-room relief. This relief is currently capped at rents of £7,500 per year. Where more than one person receives the rent from the property, each person has a tax-free exemption for rent of £3,750.

The conditions for rent-a-room relief stipulate that you must occupy the property as your main home at some point in the tax year this relief can cover income from a holiday home or buy-to-let property. Also, the accommodation must be used for residential purposes, not as an office or store room.

If you let out land or buildings which dont qualify for rent-a-room relief, the income could be covered by the £1,000 property income allowance. You cant use this allowance against rent paid by your own company, a company you work for, or one your spouse is associated with.

If either type of rental income exceeds the relevant allowance, it must be declared on your tax return, along with any related expenses. If the allowance exceeds the actual expenses, you can deduct that allowance in place of those expenses.

Action Point!
Can you claim rent-a-room relief or the property allowance?

Give and save

Giving to charity under Gift Aid can result in a win/win for both the donor and the charity.

Making a Gift Aid donation will reduce your tax bill for the year in which the donation is made if your total income is above the 40% threshold (£50,000 for 2019/20). Taxpayers resident in Scotland can save tax with Gift Aid donations if their total income, including earnings, is above the 21% threshold (£24,945 for 2019/20). Alternatively, you can shift the tax benefit of some or all of that gift back one year by telling HMRC on your tax return. This can be useful if your marginal tax rate was higher last year than in the current tax year.

To carry back the Gift Aid donation it must be made before you file your tax return for the earlier tax year. Say you make a Gift Aid donation of £2,000 on 21 December 2020. If you submit your 2019/20 tax return after that date (its due by 31 January 2021) you can include a claim in that return to carry back up to £2,000 of the donation you made on 21 December 2020, which will reduce your 2019/20 tax liability.

Gift Aid can reduce your income used to calculate the clawback of Child Benefit (income over £50,000) and the reduction in Personal Allowance (income over £100,000). It can also increase your higher rate or additional rate threshold, which determine whether you receive a Personal Savings Allowance of £1,000, £500 or nil.

To make a valid Gift Aid donation, you must declare that you will pay sufficient tax to cover 25% of the value of your gift in the year the gift is made. If you give £800 under Gift Aid, you must pay Income Tax and/or Capital Gains Tax of at least £200.

Action Point!
Do you want to make charitable donations before you complete your next income tax return?

Max out your state pension

Individuals who reach State Pension Age (SPA) on or after 6 April 2016 need to have accrued 35 complete years of National Insurance Contributions (NIC) to receive the full state pension. To receive any UK state retirement pension, you need at least ten complete NIC years.

You can check how much state pension you are due to receive through your personal tax account on gov.uk. We can help you with this.

It is possible to plug gaps in your NIC record by paying voluntary Class 2 or Class 3 NIC. This payment generally needs to be made within six years of the gap year, but there are a number of exceptions which extend that period.

You may also qualify for NI credits for some years if you were claiming state benefits, Child Benefit or were a foster carer. The NI credits were not always applied automatically, so its worth checking your own NIC record.

If you have already paid enough NIC to get the full state pension, you may consider taking further rewards from your company in other forms, such as dividends or private pension contributions.

 

Action Point!
Consider topping up your NIC record by claiming NIC credits or paying more contributions.

 

Interesting savings

All interest you receive is taxable, unless it is from an ISA, but banks and building societies no longer deduct tax from interest paid to individuals. For most taxpayers the rate of tax payable on that interest is 0%, so no tax is in fact due.

This zero tax rate applies where your savings income falls within your Savings Rate Band (SRB), which is worth up to £5,000, or within your Personal Savings Allowance (PSA), which is worth £1,000 for basic rate taxpayers or £500 for higher rate taxpayers. Any savings income which falls outside the SRB or PSA is taxed at your marginal Income Tax rate (currently 20%, 40% or 45%).

The available SRB depends on how much other taxable non-savings income you receive, such as salary, pensions, trading profits or rent. If you can control the type of income you receive you can reduce the total tax you pay for the year.

 

Example
Harry has £75,000 of capital invested at 2%, so he receives £1,500 of interest. After deducting his Personal Allowance from his salary of £17,500 he has £5,000 of taxable income, which is deemed to eat up his SRB. He is a basic rate taxpayer, so has a PSA of £1,000.
2019/2020 Non-savings Savings Tax payable
Salary/Interest £17,500 £1,500
Personal Allowance (12,500)
Taxed @ 20% 5,000 1,000
PSA (1,000)
Taxed @ 20% 500 100
Total tax payable 1,100
Harry lends £75,000 to his company, which pays him interest at a commercial rate of 7% (i.e. £5,250) under a written agreement. The company uses the money for development. Harry also reduces his salary to £13,750, so that his total income is still £19,000. Reducing his salary frees up some starting rate band to set against his interest income see below.
2019/2020 Non-savings Savings Tax payable
Salary £13,750
Interest 5,250
Personal Allowance (12,500)
Taxable @ 20% 1,250       250
5,250
SRB (5,000-1,250) (3,750)
PSA (1,000)
Taxable @ 20% 500 100
350
Harry’s tax bill has been reduced from £1,100 to £350 on the same level of income. The company must deduct tax at 20% from the interest it pays but this can be reclaimed by Harry.

 

Action Point!
Review your mix of income to maximise your Savings Allowance for 2019/20.

 

VAT on small parcels

When you order goods online you don’t expect to pay any additional taxes when they are delivered. This is currently the case for goods ordered from a supplier in the UK or the EU.

However, if you order goods from outside the EU you may receive a notice saying you must pay the import VAT before the goods can be delivered. If the supplier has already charged you the import VAT, you should not have to pay it twice.

If the UK leaves the EU without other arrangements in place (no-deal Brexit), import VAT will be due on all parcels of goods worth no more than £135, which arrive in the UK from the EU or from other countries. If the parcel is a gift to the recipient no import VAT is payable, but the parcel must be clearly marked as a gift from an individual to another individual and must be intended for personal use.

The business which sends the parcel to the customer in the UK should register with HMRC and pay the import VAT, or arrange for the parcel operator to pay the VAT. The registration is required even if the goods are zero-rated for VAT.

If your business relies on goods sent as small parcels through the post, be aware of this change in the rules. If you are sending small parcels to non-business customers in other EU countries you may have to pay import VAT to those countries.

Starting a business

Many businesses start slowly. At first there are a few occasional sales, and only after the individual has convinced themselves they can effectively deliver the product or service will the entrepreneur enthusiastically launch their business.

You should tell HMRC about the start of your new business within six months of the end of the tax year in which it started. To do this you need to decide exactly when the new business commenced. Is it when the first sale was made, or was it much later when a viable business seemed possible?

If you have had a stop-start business launch, the Trading and Miscellaneous Income Allowance (TMIA) can help you out.

The TMIA can cover up to £1,000 of trading or other sundry income per tax year. It doesn’t matter when the sales were made within the tax year, if the total is less than £1,000 the TMIA will cover them, and the allowance doesn’t have to be claimed on the tax return.

Example
Liam quit his job to launch his baking business in June 2019, having made a few test sales in January to March 2019 which amounted to £300.

The sales before 6 April 2019 can be covered by the TMIA of £1,000, so the real business can be said to start in June 2019 within the tax year 2019/20. Liam has until 5 October 2020 to tell HMRC about his new business and register for self-assessment.

Liam won’t have to complete a selfassessment tax return for 2018/19 as his taxable income was fully reported and taxed under PAYE for that year.