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It’s the most wonderful time of the year! (For investing tax efficiently)
Ok, so it might not be as exciting as the crackling anticipation for December 25 created by Andy Williams and his 1963 festive classic - but if Mr. Williams had recorded an alternative version or follow up focusing instead on UK fiscal events and deadlines in early April; this unwritten mega–hit would almost certainly have had as a central theme the need to pursue maximum tax efficiency as we approach the end of the tax year on April 5! Some annual tax reliefs (like unwanted Christmas presents) can be carried over into next year, but most of them will disappear forever if not used before that date.
ISAs are a typical example, and, from April, the annual allowance will increase to £20,000, underlining the importance of ISAs in the future of personal savings – even, to some extent, at the expense of personal pensions.
Use it or lose it
In this tax year (2016/17) you can invest £15,240 (or £30,480 combined per married couple) in an ISA with no further tax to pay on income or capital gains.
But you need to act before April 5, or the opportunity evaporates. Curiously, only 9% of ISA subscribers took full advantage of their allowance last year. (Source: HMRC, August 2016)
The amount of Inheritance tax (IHT) paid by your estate can be reduced by using certain annual allowances and exemptions. One satisfying way to reduce IHT liabilities is by gifting assets to others. IHT rules allow you an annual gifting exemption of £3,000. This can be given to one person or split between a number of people, and it comes out of your taxable estate. Used systematically over several years, this can save significant sums. You can also give small exempt gifts of up to £250 to as many people as you like. Remember to keep a record of these gifts, to make life easier for your executors.
More substantial sums can be moved beyond the reach of IHT through ‘normal gifts out of income’. These could be regular gifts to help a grandchild save for university fees, say, or to help a child save for a deposit on their first home. The gifts must be part of a regular pattern – monthly or even annually, and must come out of your income, not your capital.
Paying less Capital Gains Tax
Capital Gains Tax (CGT) also has a ‘use it or lose it’ allowance. If you sell any investments that were not in a pension fund or an ISA, any buy-to-let or second property, or valuables fetching more than £6,000, you could be liable for CGT on the profits. However, the first £11,100 of any gains in the current tax year are tax free. If your spouse’s allowance is not being used, you can transfer the assets to him or her (CGT will not apply as it is not treated as a sale.) If you both then sell assets before the end of the tax year, you can effectively double the allowance to £22,200.
Pension top-ups and taxes
For most savers, the amount they can invest into a pension each year with tax relief is capped at £40,000. If you can afford it, you can carry forward any unused allowance from the previous three tax years and allocate it to this tax year. You can also pay up to £2,880 each tax year – automatically increased to £3,600 through basic rate tax relief – into a pension for a non-earning spouse or a child.
The new pension freedoms give us more flexibility in what we do with our pension pots after retirement. That being so, it’s more important to get expert advice on how to maximise the benefits and minimise the tax you pay on withdrawals. The tax-free personal allowance for most people is £11,000 this tax year, rising to £11,500 in 2017/18. You could reduce your overall tax bill by spreading it over two or more tax years, using more than one year’s personal allowance. While some can end up paying 40pc or 45pc tax on large pension withdrawals, careful planning can limit your highest tax rate to 20pc, or even zero.
For expert guidance on the tax planning and investment options open to you, please contact Adam at Argents Wealth Management on 01603 666132.