Market View

Planning for tax year end

With tax year end fast approaching, it is essential to review existing financial arrangements to determine which tax efficient allowances, reliefs and exemptions can be fully utilised. We have outlined some of the key tax planning options available:

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isa individual savings account
Ola Adeosun, Partner and Senior Wealth Planner

Savings and investments

Individual Savings Accounts (ISAs) serve to fully protect savings from tax, allowing individuals to invest up to £20,000 per annum each tax year in a range of savings and investments, and pay no personal tax on the income or gains on the investment.

There is also scope to utilise Junior ISAs for children under 18 with an allowance of £9,000 a year. For those aged 16 to 18, there is scope to utilise their cash ISA allowance of £20,000, whilst still subscribing to the Junior ISA at £9,000 a year.  

Please note that a surviving spouse can now inherit the deceased spouses’ ISA allowance without a loss of the advantageous ISA ‘wrapper’.

How to avoid the 60% income tax trap?

Individuals with adjusted income between £100,000 and £125,140 suffer a loss of their personal allowance at a rate of £1 for every £2 of income. The loss of the personal allowance coupled with the higher rate tax payable on the income results in an effective tax rate of over 60% for income between £100,000 to £125,140. An effective way of reducing adjusted income is to make a personal pension contribution or, charitable donations. Making a personal pension contribution or charitable donation reduces their adjusted income, hereby enabling some or all the ‘lost’ personal allowance to be reclaimed. The pension contributions and charitable donations also benefit from tax relief.

Capital Gains Tax (CGT) allowances

The CGT exempt allowance for the current tax year is £12,300 per individual. Gains crystallised in excess of the allowance would be liable to tax at 10% or 20% dependent on the marginal tax rate of the individual. A transfer of assets between spouses can be made on a no gains no loss basis, allowing married spouses to make use of a combined CGT exempt allowance of £24,600.

A further key consideration is disposal of assets that stand at a loss or make a negligible claim on assets which currently have no value to offset the CGT liability in the current tax year.

Estate Planning and inheritance tax (IHT)

The IHT nil rate band of £325,000 per individual is currently frozen until April 2026,  therefore many more individuals are likely to become liable to IHT. There is an IHT exempt allowance of £3,000 in the 2021/22 tax year and once utilised, the previous tax year’s allowance can also be carried forward. You can also make £250 in exempt gifts to any number of individuals. Gifts made in consideration of a marriage are also exempt subject to certain limits.

Whilst not tax year end specific, another effective IHT strategy is to utilise the gifts out of normal expenditure from income exemption.

Tax reducers: EIS and VCTs

For those with a substantial income tax liability, there are opportunities to invest into Enterprise Investment Schemes (EIS) and Venture Capital Trust (VCTs) to benefit from a reduction in their income tax liability.

EIS investments qualify for 30% income tax relief on up to £2 million in a tax year, provided £1 million is in knowledge intensive companies, subject to maximum relief equal to the amount of your income tax liability for the tax year. In addition, gains made are free of capital gains tax once the EIS investments have been held for a minimum of three years, and where income tax relief was given at the outset. EIS investments made in the current year could be carried back to mitigate income tax liability from the previous tax year. EIS investments can also be used to defer a CGT liability provided the investment is made a year before the cystallised gain or, up to 3 years afterwards. 

Similar to EIS investments, investments into VCTs can benefit from a 30% reduction in income tax liability subject to the annual tax year limit of £200,000 into VCTs. Dividends from VCT investments are free from income tax and, you will not incur a CGT liability on disposal of the VCT investment.

Pension contributions and tapered annual allowances

The annual allowance is the lower of relevant earned income or £40,000 gross for the current tax year. Personal pension contributions benefit from basic rate tax relief at source, with higher and additional rate taxpayers being able to claim further tax relief via self-assessment.

For those who have not maximised contributions in previous tax years, there may be scope to carry forward any unused allowances from the previous three tax years to maximise contributions in the current tax year. Tax relief is applicable in the actual year of contribution. 

Individuals without any relevant income are also able to contribute up to £2,880 net into a pension per tax year. This would receive tax relief and be grossed up to £3,600. For example, parents with sufficient disposable income could utilise the regular gifts out of income exemption to maximise their children’s ISA and pension contributions.

In summary:

  1. Make use of ISAs for up to £20,000 each year to protect savings from tax.
  2. Make a personal pension contribution or charitable donation (both benefit from tax relief) as an effective way to reduce adjusted income.
  3. For the 2021/22 tax year there is a IHT exempt allowance of £3,000 and once utilised, the previous tax year’s allowance can also be carried forward. It is also possible to make £250 in exempt gifts to an unlimited number of individuals.
  4. For those with a large income tax liability, you can reduce this liability by investing into EIS and VCTs.
  5. If you haven’t maximised contributions to your personal pension in previous years, it may be possible to carry forward unused allowances.

This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Wealth Management UK LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Wealth Management UK LLP, employees and associated companies for any direct or consequential loss arising from this document.

LGT Wealth Management UK LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

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