Another tax year has been and gone, and no doubt there was a flurry of year-end tax planning carried out to good effect. Actions such as making pension and Isa contributions to ensure allowances for the year were maximised.
Where appropriate, the tax efficiencies offered by enterprise investment schemes (EIS), seed EIS and venture capital trusts will have also been considered.
Using the rapidly diminishing annual capital gains tax (CGT) exemption and, where necessary, in a way that ensured the investor was not too long out of the market but also did not trigger the dreaded bed and breakfast anti-avoidance provisions will have been considered too.
For those who have control over income flow through business ownership, payment of salaries, profits or dividends to spouses/partners could also have been declared last minute to ensure personal allowances, the dividend allowance and lower tax rates be used.
Those interested in estate planning and inheritance tax (IHT) reduction will also have considered using the annual IHT exemption (of £3,000) that can only be carried forward one year.
Quite the list.
But as tax effective as all those strategies are, how much more could one be if planning was not left to the last minute?
I would like to remind advisers the focus should be more on tax-year start planning than tax-year end.
Adopting a tax-year start strategy, supported by tax-year through planning, offers so many more benefits.
Most obviously, like anything worthwhile, taking a measured, consistent approach will yield optimum results. If you get this right, there shouldn’t really be any tax-year end emergencies to deal with.
Let me give you some examples in relation to income.
Aside from income a business owner can control, the only way to tax efficiently plan income flow is to do it earlier in the year – before it “flows”, so to speak.
When it comes to dividends and interest, that means making sure investments are structured in terms of wrappers and ownership.
So, wrappers first. Obviously ensure clients maximise their Isa and pension capabilities. After that, it’s about being aware of the dividend allowance (reduced to £500 this year from £1,000 last year) and the personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Sadly, zero for additional rate taxpayers.
There’s also the nil-rate starting band of £500, but because of the rules around its “pound for pound” reduction when income from any source exceeds the personal allowance, it’s unlikely to be of any great use to many clients of advisers.
It makes tax sense to ensure clients have enough in appropriate investments to generate income of up to those allowable amounts. At, say, a 3.5% per annum equity yield, an investment of just over £14,000 would deliver tax-free income within the allowance for an investor with no other dividends.
At an interest rate of 4% pa, a deposit of about £12,500 would deliver a tax-free return to a higher rate taxpayer. The deposit could be doubled to produce a tax-free return to a basic rate taxpayer.
For couples, the respective amounts invested and deposited can be doubled (dependent on individual tax rates) and, between a married couple or civil partners, transfers from one to another to facilitate this outcome can be made tax neutrally – i.e. without IHT or CGT consequence.
For other couples, for a transfer of cash, while CGT won’t be an issue in relation to sterling, the transfer would be a gift for IHT. The usual exemptions and the nil rate band should be available and, of course, an outright transfer would be a PET.
For a transfer of chargeable assets – for example, equities or collective investments – then, as well as the IHT consideration, the disposal would also be a disposal for CGT at market value, meaning a gain might arise.
When you get beyond these tax-free amounts, there may also be the personal allowance and, for couples, a possible lower tax rate for one may make the asset transfer still worthwhile.
Beyond these strategies, it may also be worth considering the tax efficiency, deferment and administration qualities of an investment bond. Dividends arising inside a UK or offshore bond will be tax free – without limit – and interest taxed at 20% inside a UK life policyholder fund and 0% inside an offshore bond.
You also have the ability to manage tax on encashment, with a basic rate credit available on gains made under a UK bond.
With the dramatic reduction of the CGT exemption and dividend allowance, the investment threshold above which investment bonds are worth considering has dropped dramatically.
None of these strategies can save tax in a tax year if you only implement them at the end of that year.
That’s also true for actively managed portfolios, where the investor is looking to avoid personal taxation of capital gains in light of the reduced CGT exemption but not go into a bond.
Here, collectives (unit trusts and Oeics) as opposed to “tax transparent” managed portfolios are attracting greater interest.
Another big benefit of tax-year start planning is removing the anxiety many feel making last-minute investment decisions for relatively large amounts, which is what happens leaving Isa or pension investments to tax-year end.
The solution to this is to commit to regular investment throughout the year. Clients might also gain the benefit of age-old pound cost averaging. Remember that?
Tony Wickenden is managing director of Technical Connection
Comments