With the end of the current tax year (5 April 2019) fast approaching, we have outlined below some of the main things that individuals, entrepreneurs and their families should look at ahead of the tax year end, to ensure that their personal tax affairs are in good order and all available tax allowances and exemptions are utilised.
• • Income Tax
• • Pensions
• • Capital Gains Tax
• • Using current year exemptions and allowances
• • Tax efficient investments
• • Non-UK domiciled individuals
• • Inheritance tax
• • Tax administration
Individuals with total income in excess of £150,000 pay the additional rate of income tax, currently 45%, though certain individuals with income between £100,000 and £123,700 (in 2018/19) are subject to an effective 60% tax rate due to the phased removal of the personal allowance. Different tax rates may apply to Scottish residents. We have outlined below some straightforward options for you to think about; please contact us if you require assistance in this area.
TRANSFERRING ASSETS TO SPOUSE OR CIVIL PARTNER
If your spouse or civil partner does not have sufficient income to utilise their personal allowance (£12,500 for 2019/20) or their nil, basic or higher rate tax bands, it may be sensible for you to gift sufficient income-producing assets to them to enable them to do so.
Calculating the effect of the transfer of income producing assets can be complex, due to the interaction of the savings rate of tax, the savings allowance, the dividend allowance and the withdrawal of the personal allowance from those with income of over £100,000. Furthermore, different tax rates apply to non-savings income of Scottish resident taxpayers, which would also need to be taken into account if relevant. The wider implications
of making gifts to your spouse or civil partner must also be considered.
PRESERVING YOUR PERSONAL ALLOWANCE
Where your income is between £100,000 and £123,700 (for the current year tax, 2018/19), your personal allowance is phased out, resulting in an effective rate of tax of up to 60% (61.5% for Scottish residents) within this income bracket. Taxable income can be reduced through pension contributions (subject to restrictions set out later in this note) and charitable donations. The wider implications of making such contributions and donations should be considered.
Tax relief is available for cash gifts to UK registered charities, and certain charitable organisations in the EU, Norway, Iceland and Liechtenstein, although non-UK charitable organisations have to satisfy certain conditions. If a 45% taxpayer makes a cash donation to a charity of £20,000 under the ‘Gift Aid’ scheme, the charity may reclaim £5,000 from HM Revenue & Customs (HMRC) and the donor will obtain tax relief of £6,250 via their tax
return. The overall effect is that the charity receives a £25,000 donation at a net cost to the donor of £13,750. Tax relief may be available for certain charitable donations not made in cash form, but you should review this to ensure that any tax relief is claimed appropriately.
ARE YOUR INVESTMENTS HELD IN A SENSIBLE STRUCTURE?
You need to think about the effect of corporation, income and capital gains tax rates on the way you own investments. At present the rate of corporation tax is 19%, reducing to 17% from 1 April 2020. The top rate of income tax is 45% for most income (46% in Scotland), and 38.1% for dividends after the £2,000 dividend nil rate band. The top rate of Capital Gains Tax (CGT), after the annual exemption of £11,700 for 2018/19, is 20% on most assets, and 28% on residential property and carried interest. Anti-avoidance rules may apply in some circumstances that can result in an income tax charge arising instead of CGT, including in
particular where distributions are received on the winding up of a close company and the shareholder is in some way involved in the same or a similar trade or activity following the liquidation.
With this in mind, you should review how your investments are currently structured, taking into account the overall net effective rates of tax on investment returns, now and in the future.
When choosing the right investment vehicle, there are a number of tax and wider considerations that need to be taken into account. Similar issues apply if you are self-employed in respect of self-employment income. The most appropriate vehicle will be largely driven by your circumstances and intentions, and so the position should
FULLY UTILISING ANNUAL PENSION CONTRIBUTIONS
The amount of tax-deductible pension savings that can be made for each individual is limited to the ‘annual allowance’ of £40,000. Since 6 April 2016 the annual allowance for individuals with income of more than £150,000 has been reduced by £1 for every additional £2 of income between £150,000 and £210,000, resulting in an annual allowance of £10,000 for those with taxable income (as defined) of £210,000 or more. Where pension savings for the last three years have been lower than the annual allowance for the relevant year, there may be scope for catching up on pension savings in the current year. Therefore in 2018/19 unused
allowances from 2015/16 onwards could be utilised. The allowances will be available if the individual was a member of a UK registered scheme in the relevant tax year (this may be extended to membership of overseas pension schemes in some cases). In some cases, contributions of up to £160,000 could attract tax relief in 2018/19. The rules are detailed and complex. In addition to these complexities, the ‘lifetime allowance’ (i.e. the total savings that can be accumulated in registered pensions without incurring a tax charge) will need to be considered. The lifetime allowance is currently £1,030,000 (2018/19). You should review this before making any contributions.
CAPITAL GAINS TAX (CGT)
CLAIMING TAX RELIEF FOR CAPITAL LOSSES
Capital losses must be claimed within four years of the end of the tax year in which the loss is realised. This means that capital losses realised in 2014/15 must be claimed by 5 April 2019. This would generally be done as part of your tax return, but it is important to consider whether or not you may have losses to claim which have not been claimed previously. This is particularly relevant to non-UK domiciled individuals (see below). In addition, it may be possible to claim a capital loss if you hold assets or investments which have fallen in
value and are now worthless, or if you have previously made loans to a UK trading company (or other UK trader) which have become irrecoverable. Where a capital loss relates to shares in an unquoted trading company, it may be possible to offset the loss against income which would otherwise be taxable at up to 45% income tax. The loss that can be set off in this
way is typically capped at the higher of £50,000 or 25% adjusted total income. The conditions to claim a loss and the claim itself can be complicated.
The CGT rate for higher and additional rate taxpayers is 20% for assets other than residential property and carried interest where the rate is 28%. However, a 10% CGT rate can apply to qualifying capital gains up to a lifetime limit of £10 million where entrepreneurs’ relief is available. The maximum possible tax saving is therefore £1 million.
If you expect to sell a business asset or shares or loan notes in a trading company, you should review your personal tax position as soon as possible to determine whether entrepreneurs’ relief, and therefore the 10% CGT rate is available. In order to claim entrepreneurs’ relief a number of conditions need to be met. The conditions in respect of interests in companies were tightened in respect of disposals on or after 29 October 2018. If these conditions are not currently satisfied, action may need to be taken, but advance attention is key as there are certain qualifying conditions which must be satisfied for a period of at least 12 months leading up to a disposal. This period will be extended to 24 months for disposals on or after 6 April 2019, so action before that date may be appropriate in some circumstances.
As for entrepreneurs’ relief, investors’ relief results in a 10% CGT rate on up to £10 million of qualifying gains over an individual’s lifetime. Individuals who subscribe for ordinary shares in an unlisted trading company, in cash, on or after 17 March 2016 may be eligible to claim investors’ relief on shares held for at least three years following 6 April 2016. Investors’ relief will therefore be available on qualifying disposals from 6 April 2019. It is important to be aware of the conditions and the holding period so that relief can be claimed on disposals from 6
April 2019 where appropriate.
USE YOUR CGT ANNUAL EXEMPTION
Each individual has an annual exemption of £11,700 (for 2018/19). If you do not use your annual exemption it cannot be carried forward and is lost. Consideration could be given to selling assets to realise gains if this is consistent with the overall investment strategy. However, anti-avoidance rules mean that if shares and securities are sold and repurchased within the following 30 days, the disposal will be matched with the later acquisition when the gain is calculated.
GIFT TO SPOUSE OR CIVIL PARTNER PRIOR TO A DISPOSAL
Is your spouse or civil partner a lower rate taxpayer? You may normally gift an asset to your spouse or civil partner free of tax. If your spouse or civil partner were to then sell the asset, the resulting gain may be covered by their CGT annual exemption or their capital losses, and/or attract a 10% or 18% CGT rate, instead of 20% or 28%, depending on the nature of the asset.
In order for this to be effective, any gift of assets must be absolute and unconditional and any practical considerations should be taken into account. Other tax implications should
be considered, including the anti-avoidance provisions which could restrict the offset of losses. If your spouse or civil partner is non-UK domiciled, the inheritance tax implications of any gift should be considered (see below).
MAIN RESIDENCE RELIEF
Where a property is used as the owner’s only or main residence throughout the ownership period, any gain on disposal is exempt from CGT. Married couples and civil partners can only have one main residence between them. If more than one property is used as a residence by an individual or couple, it is possible to elect which one should be treated as the main residence for CGT purposes. The election must be made within two years of the residences available to an individual changing (e.g. within two years of a new property being acquired). It should be noted that rental properties on which a capital gain is unlikely to arise may constitute a ‘residence’ for the tenant. This should be borne in mind when considering whether or not a main residence election is appropriate. Since 6 April 2015 additional rules have applied if the property is located in a different country to that in which the taxpayer resides. Broadly, taxpayers must occupy the elected property as a residence for at least 90 days in the tax year in order for it to qualify for relief in respect of that year. These rules are complex and those in this situation should take advice at an early opportunity. Note that for disposals on or after 6 April 2020 further restrictions are intended to apply to private residence
relief. At present the period relating to the final 18 months of ownership of a property which has been a taxpayer’s main residence is exempt from CGT. This exemption will be cut to nine months. The second change is to ‘lettings relief’, which currently exempts from CGT gains accruing in a period when a property which has been used as a main residence is let. The maximum relief is £40,000. This relief will now be restricted to apply only to periods where the owner jointly occupies the property with the tenant. These changes could increase the
tax due on affected disposals and a review of the situation prior to April 2020 may be appropriate.
NON-RESIDENT CAPITAL GAINS TAX (NRCGT)
Since 6 April 2015, any gains realised by non-UK residents (including individuals, trustees and companies) who dispose of UK residential property are within the scope of CGT. Rebasing to 5 April 2015 value may apply. Each disposal needs to be reported on a NRCGT return within 30 days of the date of disposal, which is usually treated as completion for these purposes. In addition, any CGT due may need to be paid within the same 30 day time period.
The scope of NRCGT will be extended from 6 April 2019. It will also apply to disposals of directly owned UK non-residential property, such as commercial buildings and farmland, and, in certain circumstances, to disposals of assets which primarily derive their value from UK property including, for example, shares in companies that own a high-proportion of UK land, whether residential or non-residential. Some existing CGT exemptions for non-UK
residents on UK residential property gains will be abolished, such as the exemption for ‘diversely-held’
companies. Rebasing will be available to 5 April 2019. Those potentially affected by these complex rules should seek advice as a matter of urgency.
USING CURRENT YEAR EXEMPTIONS AND ALLOWANCES
Individuals are entitled to exemptions and allowances each tax year. The main exemptions and allowances not already mentioned in this briefing note are:
INHERITANCE TAX (IHT) ANNUAL EXEMPTION OF £3,000 PER ANNUM
This is the amount individuals can give each tax year, without any IHT implications. If the previous tax year’s (2017/18) £3,000 annual exemption was unused, £6,000 can be given away tax-free in 2018/19. Other reliefs and exemptions may also be relevant.
STAKEHOLDER PENSIONS OF £3,600 PER ANNUM (GROSS)
Any UK resident individual under the age of 75 can contribute up to £2,880 (net) into a stakeholder pension each year, irrespective of their earnings or whether or not they are employed, so can be funded for non-working spouses and children. The pension provider will reclaim 20% tax relief direct from HMRC, and therefore the policy will be credited with a gross contribution of £3,600. It is important to note that the funds will not be accessible until pension age (currently 55).
INDIVIDUAL SAVINGS ACCOUNTS (ISAS)
The annual overall subscription limit for an ISA for 2018/19 remains at £20,000, which can be invested in cash, UK stocks and shares, foreign shares, corporate bonds and other permitted investments. ISAs are available to UK resident individuals aged 18 or over (age 16 or over for cash ISAs). The investment return from ISAs is free from income tax and CGT.
Other types of ISA exist, being the Innovative Finance ISA, the Help to Buy ISA, and the Lifetime ISA. The annual investment limit applies across all ISAs in total. It is important to be aware of the conditions and features of the various ISAs before investment to ensure that the appropriate ISA vehicle is used for your specific circumstances. A comparison with saving into a pension is also important. Regulated financial advice may be required.
Junior ISAs are available to children under the age of 18 who are UK resident and who do not have a child trust fund. The annual subscription limit in 2018/19 is £4,260, which can be split between stocks and shares and/or cash. The funds are ‘locked in’ until the child is 18 when the account will default to a normal ISA, if the funds are not withdrawn. Ordinarily, when a parent gives money to a child, if the income arising from the gift exceeds £100, the whole of
the income is taxable on the parent (whilst the child is under 18). This provision does not apply to a Junior ISA.
TAX EFFICIENT INVESTMENTS
There are a number of statutorily provided tax efficient investments available, including National Savings (www.nsandi.com), the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Social Investment Tax Relief (SITR), and Venture Capital Trusts (VCTs). EIS, SEIS, SITR and VCT investments all have annual limits, as follows:
EIS – £1,000,000 with income tax relief of 30%, or up to £2,000,000 provided the additional £1,000,000 is invested in ‘knowledge-intensive’ companies SEIS – £100,000 with income tax relief of 50% (see below for more detail) SITR – £1,000,000 with income tax relief of 30%
VCT – £200,000 with income tax relief of 30% Any gains realised on disposal of shares in the above four tax efficient investments, and loans in the case of SITR, may be exempt from CGT. In addition, it may be possible to defer gains on disposal of other assets into EIS or (currently) SITR investments or, in the case of certain SEIS investments, effectively make part of the
gain on disposal of other assets exempt from CGT. SITR was originally due to expire for new investments from 6 April 2019. The relief has been extended so that income tax relief and the CGT exemption on disposal of the social enterprise will be available for new investments made before 6 April 2021. However, the legislation relating to deferral of CGT on gains made on disposal of other assets has not been so extended. This means that, in the absence of a change to the rules, it is only possible to hold-over gains made before 6 April 2019. The government have announced that they intend to open a review into SITR in ‘early 2019’, at which point further information on the intentions in this area may become available.
The tax rules relating to these investments are complicated and it is important to take professional advice. Regulated financial advice may also be required.
NON-UK DOMICILED INDIVIDUALS
DEEMED UK DOMICILE (DD)
Certain individuals who are legally non-UK domiciled are deemed to be UK domiciled for income tax, CGT and IHT purposes. The effect of this is that the remittance basis of taxation is normally unavailable, and the individual’s worldwide estate is within the scope of IHT. It is important to take advice before becoming DD. There are two key situations in which individuals become DD:
1. LONG-TERM UK RESIDENTS become DD once they have been UK resident in 15 of the preceding 20 tax years. Individuals who have been continuously UK resident since the 2004/05 tax year will therefore become DD on 6 April 2019. Individuals who first commenced UK residence before 2004/05 may also become DD on 6 April 2019, depending on their pattern of UK and non-UK residence.
2. FORMERLY DOMICILED RESIDENTS are UK resident individuals who were both born in the UK and who had a UK domicile at birth. Formerly domiciled residents are DD for income tax and CGT purposes whenever they are UK resident. DD for IHT only applies if the individual is UK resident in a given tax year and was UK tax resident in one of the two previous tax years. This means that formerly domiciled residents who commenced UK residence in the 2018/19 tax year will become DD for IHT purposes on 6 April 2019, assuming they are
also UK resident in 2019/20. The remittance basis remains automatically available to DD individuals who are legally non-UK domiciled with less than £2,000 of unremitted foreign income and gains in a given tax year. It is possible to opt out of the remittance basis, if preferred. Significant changes to the taxation of trusts established by non-UK domiciled individuals have been made in recent years, which are relevant to all individuals who are legally non-UK domiciled, whether or not the individual in question is DD.
For a limited period until 5 April 2019, it is possible for eligible non-UK domiciled individuals to separate funds held in ‘mixed funds’ into their constituent parts. Broadly, mixed funds are funds which contain different types of income, capital gains and ‘clean capital’ (amounts that can be remitted to the UK without incurring a (further) UK tax charge), and/or accounts that contain amounts that were received in different tax years. ‘Unmixing’ enables mixed funds to be separated into their constituent parts, which can enable future remittances to the UK to be managed. Unmixing is only available to funds held in cash overseas. To be eligible, the individual who wishes to unmix funds must have paid tax on the remittance basis in at least one tax year between 2008/09 and 2016/17 (inclusive) and have been born overseas and/or have had a non-UK domicile at birth. Given the limited time available to make use of this one-off opportunity.
Non-UK domiciled individuals who are DD or who have never claimed the remittance basis are eligible to claim relief for foreign losses in the same way as UK domiciled individuals (as set out above). Individuals who have claimed the remittance basis and who are not DD must make an election (a Section 16ZA election) in order to be able to do so. Section 16ZA elections must be made within four tax years of the first year after 2007/08 in which the remittance basis is claimed. This means that those who first claimed the remittance basis in 2014/15 must make the election by 5 April 2019 if they wish to do so. The wider implications of making such an election should be considered, and it may not be appropriate to do so in all cases. If an election is or has been made, potential foreign loss claims for earlier years should be considered. This may be relevant where losses were not computed when they made, or where the Section 16ZA election is made some years after the remittance basis was first claimed. Losses must be claimed within four years of the end of the relevant tax year, so losses relating to 2014/15 must be claimed by 5 April 2019.
INHERITANCE TAX (IHT)
In general, 40% IHT is payable on the value of the estate on death, subject to any exemptions available. Lifetime planning can also reduce the overall IHT suffered. The use of the annual £3,000 exemption for IHT is dealt with above. In addition, gifts made out of income on a regular basis can also be made without any IHT implications. It is important to ensure that gifts are made as part of a normal pattern of expenditure and that the donor retains sufficient income to maintain his or her normal standard of living after the gift. It is recommended that the intention to make regular gifts out of income is documented from the outset of the
arrangements and that appropriate records are maintained. On a more general level, it is important to review any lifetime planning and your will at regular intervals to ensure that they continue to meet your objectives for succession and are appropriate in the light of current
legislation, for example changes in pensions rules which affect the tax position when pension death benefits are passed to successive generations, the effect of the residential nil rate band, the reduced IHT rate if 10% of the net estate is left to charity etc. You should also ensure that the conditions for any available exemptions (for example business property relief on unquoted shares) are met. Particular rules apply to couples where one spouse is UK domiciled and one is not. The detailed IHT rules are beyond the scope of this note.
KEEP ADEQUATE RECORDS
It is important to be able to substantiate tax return entries with underlying records, particularly in the event of an enquiry. Depending on the source of income or gains, there is a requirement to retain the underlying records for up to 5 years from the 31 January following the year of assessment. Following the introduction of the Common Reporting Standard, HMRC now receive taxpayer information directly from other jurisdictions, and enquiries may increase as a result. Note also that the time limit for HMRC to raise assessments relating to
offshore matters will increase from four to 12 years (if reasonable care was taken) and from six to 12 years in cases of careless error. The increased periods will apply to tax years from 2013/14 onwards in cases of careless error, and 2015/16 in cases of careless error. The time limit for cases where deliberate errors were made remains at 20 years.
COMMON REPORTING STANDARD AND TRUSTS
The Common Reporting Standard (CRS) requires Financial Institutions (as defined) to report financial account information relating to residents of participating jurisdictions so that this can be exchanged between the relevant jurisdictions. Professionally managed trusts which derive income primarily from financial assets are likely to come within the definition of Financial Institution. UK resident trusts which are Financial Institutions will need to review their Account Holders (mainly the settlor and beneficiaries of the trust) and report the necessary
information to HMRC by 31 May 2019. Such trusts will also need to consider whether they have any reporting responsibilities under US FATCA.
A number of claims and elections relating to the 2014/15 tax year have a time limit of 5 April 2019, and so need to be considered before that date. Further to the points included above, note that relief for tax overpaid in 2014/15 must be claimed by 5 April 2019.The most likely scenario in which this could occur is for those taxed under PAYE, where the PAYE deductions are excessive, although overpayments could arise in other cases.