End of Year Tax Planning

March 21st, 2014

With less than two months to go before the end of the current tax year, this article focuses on some year-end tax planning opportunities that could be of benefit to you.

Income Tax

Make full use of any Income Tax allowances by transferring investments between spouses.

This is of most benefit where one spouse is a non-taxpayer and the other is a higher-rate taxpayer because any income generated following the transfer to a non-tax paying spouse will then be tax free to the extent that it falls within their available personal allowance (with the exception of course to the 10% tax credit on dividend income which cannot be reclaimed).

Transferring investments between spouses can also help preserve an entitlement to the age allowance (for those who attained age 65 before 6 April 2013) and the basic personal allowance if the transferor would otherwise have total income over £100,000.

In order to try to maintain a full age allowance or basic personal allowance the following strategies could also be considered:

    • Draw an income from tax efficient investments such as ISAs
    • Make use of the 5% tax-deferred capital withdrawals from investment bonds
    • Switch from income generating funds to funds geared for capital growth; and/or
    • Make pension contributions (if you are under 75) and/or donations to charity, both of which reduce your total income by the amount of the gross contribution for the purpose of the personal allowance income test.

Pension Contributions

If you are under age 75 and do not have Enhanced Protection or Fixed Protection 2012, making pension contributions should be considered because of the tax-relief available, although if large personal and/or employer contributions are being made care should be taken to ensure that the available annual allowance is not exceeded. 

For those individuals with no existing lifetime allowance protection and large pension pots that already exceed (or are likely to exceed in the future) the reduced standard lifetime allowance of £1.25m that will apply from 6 April, consideration would also need to be given to the merits of applying for Fixed Protection 2014 before the deadline date of 5 April 2014. (Note: Individuals with total pension rights over £1.25m as at 5 April 2014 will also be able to apply for Individual Protection 2014 either in isolation, or in conjunction with Fixed Protection 2014, but the deadline for registering for this is not until 5 April 2017). 

In addition to helping to preserve personal allowances, a correctly timed pension contribution can also help reduce or eliminate an income tax liability on an investment bond gain or the rate of capital gains tax due on the disposal of assets such as unit trusts or shares.

ISA’s

Have you made full use of your ISA allowances for the current tax year? 

Individuals who pay tax should always consider trying to maximise the contributions they make to an ISA because even though tax relief is not received on the contribution, any growth on the investment is in a tax-efficient environment and benefits can be drawn tax-free.

In 2013/14, the maximum contribution is £11,520, of which £5,760 can be paid into a cash ISA.

Capital Gains Tax

In addition to realising gains up to the annual capital gains tax exemption (£10,900 in 2013/14) if you have investments standing at a loss, these can be sold to realise the loss and offset against gains beyond the annual exemption. For example, a £15,000 gain combined with a £5,000 loss gives a tax-free net gain of just £10,000.

Spreading gains over two or more tax years can also help make use of multiple tax-free allowances (for example, by selling half of an investment on 5 April and the other half on 6 April) and if you are married it should also be borne in mind that, because both you and your spouse each have an annual CGT exemption, assets can be transferred tax-free between you before disposal in order to double the exemption available. The rate of CGT for a higher rate tax payer is 28%, so gains beyond the annual exemption are best realised in a spouse’s name if they pay tax below the higher rate.

And last, but not least, it is worth noting that from 6 April 2014 the final period exemption for properties that have been used as a person’s principle private residence at some time in the past (even though they may not using the property as their main residence now) will be reduced from 36 months to 18 months. Individuals who have moved home recently, perhaps as a result of a new job, but who still own the old property may therefore need to sell their old property more quickly than anticipated in order to avoid a potential liability to CGT.

Inheritance Tax reliefs

One of the simplest methods of inheritance tax planning is to make full use of this year’s annual £3,000 exemption and any unused exemption from the previous year. The current year’s exemption must be used first before using any of the available previous years.

The normal expenditure out of income exemption can also be useful. This relief cannot be carried forward and to use this exemption the gifts must be regular, made out of income and of such a size so as not to reduce the donor’s normal standard of living. 

Gifts between spouses, irrespective of the size, are also exempt if the spouse is domiciled in the UK and the smalls gifts exemption of £250 per individual per tax year should not be overlooked either.

Note: – Any reference to “spouses” and “married couples” in this article includes same-sex couples who are registered civil partners.

The Financial Conduct Authority does not regulate taxation advice

The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future