As we head into the season to submit tax returns for the tax year ended 5 April 2018, it’s a good time to think about saving tax in the current tax year. There are many points to consider as you plan for the future, and we will be pleased to advise in areas of such perennial importance as the following:
Disposing of capital assets
Careful planning is essential when it comes to disposing of capital assets such as a second home, jewellery, shares, a business or antiques and works of art. An individual can make capital gains up to the annual exemption limit without paying capital gains tax, and each spouse/civil partner will have their own limit. For 2018/19, this limit is £11,700. It can’t be carried forward to a future tax year, and can’t be transferred to anyone else, including a spouse or civil partner. Thus it can sometimes be advantageous to transfer assets between spouses or civil partners to ensure that each individual’s annual exemption is used.
Making the most of your pension
The annual allowance, which sets a cap on the amount you can contribute to a pension and still get tax relief, is £40,000 in 2018/19. Contributions in excess of this are potentially charged to tax on an individual as the top slice of income. There are, however, restrictions on the annual allowance available for those with adjusted annual income over £150,000, so that it can potentially be reduced to a minimum of £10,000.
However, unused annual allowance can often be carried forward for up to three years. This means unused allowances for the three years prior to the current tax year can be used this year. The remaining allowance for 2015/16 would therefore need to be used by 5 April 2019, but can only be utilised after using the annual allowance for the current year.
Using your ISA allowance
Individual Savings Accounts (ISAs) can make a tax-efficient investment, since income from ISA investments is exempt from income tax, and capital gains made on investments held in an ISA are exempt from capital gains tax. The maximum you can save in ISAs for 2018/19 is £20,000. This can be split between different ISAs, though funds may be invested in only one of each type per tax year. An ISA allowance can’t be carried into the next tax year, so it’s worth planning now to take advantage of it.
There are now quite a range of ISAs on offer. They include the Innovative Finance ISA, designed for peer to peer lending - essentially lending that cuts out a bank. These usually offer higher returns because of the higher risk. An ISA portfolio could include a small subscription in a higher risk ISA like this.
Adults under the age of 40 might want to consider the Lifetime ISA. Here up to £4,000 per annum can be invested. This counts towards the overall annual ISA limit, but the advantage is that the government will put in a 25% top up, up to a maximum of £1,000 per annum. The Lifetime ISA is designed to fund the purchase of a property for a first-time buyer to live in (not as a buy-to-let), or to save for later life. Where two first-time buyers are buying a home together, each buyer – if eligible – can take advantage of the Lifetime ISA bonus. There are various conditions, including a charge for early withdrawals.
If you are considering a capital disposal this tax year, or considering investment or pension choices, we would be delighted to help you structure your affairs tax efficiently.