Year-end UK tax planning
Income tax planning
The marginal UK income tax rate remains unchanged at 45% for taxable income over £150,000, and 38.1% for dividends over this threshold. Scottish taxpayers still are subject to different rates, with a 46% rate for income (including dividends) over £150,000.
The personal allowance, which exempts the first £12,500 of income, is progressively withdrawn for certain individuals with income over £100,000. For 2019/20, the allowance is nil when income exceeds £125,000, and a marginal rate of 60% applies to income falling between £100,000 and £125,000.
The £1,000 personal savings allowance still remains, but is phased down to £500 for higher rate taxpayers and fully phased out for additional rate taxpayers. The £2,000 allowance for dividends still remains and is not phased out.
Accelerating or deferring income
Individuals who have control over the timing of the receipt of income may consider either accelerating or deferring the receipt. Acceleration may be appropriate if the individual is expecting to be subject to a lower marginal rate in 2019/20 than 2020/21. Deferral may otherwise be appropriate in other cases, in order to defer the payment of taxes. It is important, of course, to check that the deferral is actually effective for tax purposes.
Cash gifts to UK charities (and certain European charities) are eligible for tax relief under the “gift aid” scheme. Under the mechanics of the relief, 20% of the gross gift is paid by HMRC to the charity. To give an example, for a 40% taxpayer making an £800 donation to a charity, the gross value of the gift is £1,000 since the charity can claim back £200 from HMRC. The individual may claim 20% tax relief on their tax return on the gross value, reducing the net cost to £600. He or she must have paid sufficient UK tax for the year in order to cover the 20% paid over by HMRC.
The gift can even be made after the end of the tax year and “carried back”, provided that it is made before 31 January, and before the date the original tax return is filed. This is particularly valuable to wealthy individuals who have substantial surplus funds and philanthropic goals. Individuals wishing to maximise their tax relief should wait until after the end of the tax year when their tax liability is known and the precise maximum gift can be calculated.
Gifts of land and shares can also be made to charities under a different set of rules. Any gain triggered by the gift is exempt from capital gains tax and the gift itself should not be subject to inheritance tax (IHT). Asset donations can therefore be particularly attractive.
Registered pensions remain very tax efficient. The combination of relief on contributions, tax free growth in the pension fund itself, as well as the ability to take a tax-free lump sum on retirement make these vehicles very attractive. To the extent pension benefits are not drawn, they are generally exempt from IHT.
Up to £40,000 of contributions to a registered pension scheme can generally be claimed as a tax deduction (the “annual allowance”). The allowance is capped at the level of the individual’s earnings, if lower than £40,000. Where the individual’s income exceeds £150,000, the relief is reduced by £1 for every £2 over £150,000 resulting in a maximum deduction of £10,000 if income is greater than £210,000. Individuals who have already started to access their pension savings may have a reduced annual allowance of £4,000.
Pension contributions are particularly valuable for those earning between £100,000 and £125,000 since they are subject to a 60% tax rate on that income as explained above.
Individuals should consider making additional contributions to their pension schemes before 5 April 2020 in order to obtain relief at up to 40% or 45%.
The £40,000 annual allowance may be carried forward up to three years. As such, individuals should review the availability of any unused allowance for 2016/17 since this will expire on 5 April 2020.
The total value of an individual’s pension pot should not exceed the “lifetime allowance” of £1.055m for 2019/20. Exceeding this can result in unwanted future tax charges.
Married couples and civil partners may wish to contemplate a transfer of income producing assets between themselves, in order to ensure that the income is taxed at the lowest possible rate where one spouse has a lower marginal rate. Various anti-avoidance provisions need to be considered when doing this.
For couples with children, it is possible to transfer income between one another in order to keep both spouse’s income below the £50,000 threshold of the High Income Child Benefit charge.
The threshold set by the government for taxpayers paying Class 1 or Class 4 NICs has risen to £9,500, effective from 6th April 2020.
Capital gains tax planning
The capital gains annual exemption is £12,000 for 2019/20. Unlike the income tax personal allowance, this is not reduced for high income taxpayers. The annual exemption is not generally available for non-domiciled individuals claiming the remittance basis.
The marginal capital gains tax rates remain at 28% for fund managers’ carried interest and residential property, and 20% for most other assets. A 47% rate may apply to “income-based” carried interest.
Individuals should consider whether steps can be taken to crystallise gains on assets before 6 April 2020 in order to take advantage of the annual exemption. For example, assets could be sold and then repurchased. Note that this is not effective for shares unless there is a 30 day gap between the sale and reacquisition.
If the individual has capital gains taxable for 2019/20 then he or she may wish to consider selling other assets standing at a loss before 6 April 2019, in order to offset the gain. It may, alternatively, be possible to make a “negligible value” claim for assets which are of negligible value.
Transfers between a husband and wife who are living together can generally be made without a capital gains tax charge. Therefore, it can make sense for assets to be transferred between spouses before being sold in order to take advantage of both spouses’ annual exemptions, or lower tax rates.
A lower 10% rate may be available on up to £10 million of gains qualifying for Entrepreneurs’ Relief. The rules are complicated, but the relief is intended to apply only to the sale of a 5% or greater interest in a trading business for which the individual works. The conditions for this relief to apply must be satisfied for 24 months before the disposal date. Some reports have suggested that the availability of Entrepreneurs’ Relief may be reviewed in the next budget, therefore individuals currently contemplating selling a business may wish to accelerate this to before 6 April 2020.
Mortgage Interest Relief
The phase out of mortgage interest relief for residential properties is in its final stage for 2020/21, with landlords being able to obtain only 20% relief on mortgage interest paid.
Principal Private Residence Relief
From 6 April 2020, the 18 month deemed occupation period at the end of ownership of an individual’s principal private residence is going to reduce to 9 months. The property will be treated as an individual’s principal private residence for that 9 month period, even if it was not.
From 6 April 2020, the £40,000 CGT relief that is available where an individual lets their principal primary residence is now only going to be available to individuals where the owner is also residing in the property at the same time as the tenant.
UK residential property CGT payment
From 6 April 2020, CGT due on the sale of residential properties must be paid to HMRC within 30 days of the transaction, instead of being paid at the time of filing the self-assessment tax return. A provisional calculation of the gain must also be submitted to HMRC within 30 days. The gain is subsequently reported on the individual’s self-assessment tax return for that year and any adjustments to the calculation can be made and reflected with submission of the return.
These new rules are likely to bring additional compliance burdens for individuals who are selling residential properties.
Stamp Duty Land Tax (SDLT)
There have been rumours about a new 3% stamp duty surcharge for non-resident buyers of UK residential property. It is anticipated that this will be in addition to the existing 3% surcharge although at the time of writing this is unclear.
There will likely be no confirmation on this change until the budget is announced, but is in line with the Government’s election manifesto.
Individuals may invest up to £20,000 per year in an individual savings account (“ISA”). The income and gains arising within the ISA are tax-free. There are also other types of ISAs with lower thresholds such as a “Junior ISA” for children, and “Lifetime ISA” for 18 to 40 year olds. The “Help to Buy ISA” is no longer available for first time buyers and was closed in November 2019.
Individuals may claim a 30% tax reduction by investing (for at least three years) in Enterprise Investment Scheme (EIS) shares in unquoted trading companies. Up to £1 million can be invested, or £2 million for investments in knowledge intensive companies. Any capital gain on sale after three years is exempt from tax.
The Seed Enterprise Investment Scheme provides tax relief on investments in qualifying trading companies that are less than two years old. The relief is 50% on investments up to £100,000, and any subsequent capital gain on sale of the shares is exempt provided the shares are owned for three years.
Up to £200,000 may be invested in shares in a venture capital trust (VCT) resulting in a tax reduction at 30% of the investment. VCT dividends and capital gains are tax-exempt.
Social Investment Tax Relief (SITR) is a 30% tax reduction for investment in social enterprises. The relief is capped at £1m a year per investor, but this can be carried back to the previous year. Gains on sale are tax exempt.
Furthermore, capital gains on the sale of another asset can be deferred if the proceeds are reinvested in EIS, SEIS or SITR shares within three years. Individuals should bear in mind that capital gains tax rates may rise in the future and therefore there is always a risk that deferred gains could end up being subject to a higher rate of tax.
Shares in unquoted trading companies subscribed for on or after 17 March 2016 can be eligible for a 10% tax rate on sale after 5 April 2020, up to £10 million. Individuals who hold shares qualifying for this relief should therefore consider deferring any disposal until after 5 April 2020. Various conditions must be satisfied in order to qualify for the reduced tax rate.
Non-domiciled but UK resident individuals wishing to bring funds into the UK without triggering the remittance basis charge can no longer consider “cleansing” their offshore mixed bank accounts, as the deadline for this was 5 April 2019.
Those non-domiciled individuals whose 15th year of residence in the UK is in 2020/21 (i.e. individuals who have been continuously resident in the UK since 2005/06), will be considered deemed domicile as of 6 April 2020. The ‘non-domicile’ status for those individuals is no longer available, nor is the remittance basis of taxation.
Certain UK resident but non-domiciled individuals are able to claim relief for losses on foreign assets against UK gains. This is not applicable to those individuals who file on the remittance basis. Those individuals wishing to claim this relief must make the appropriate election within 4 tax years of the first year in which the remittance basis was claimed. Therefore, those who first claimed the remittance basis in 2015/16 have until 5 April 2020 to make the election.
The remittance basis charge of £30,000 for individuals who have been resident in the UK for more than 7 out of the past 9 years still applies. This is increased after the 12th year of residence to £60,000.
Individuals considering moving to the UK
Individuals who are not currently UK resident but who are contemplating moving to the UK should consider appropriate planning before their arrival. Such planning should ideally be undertaken during a full tax year of non-residence (e.g. implemented by 5 April 2020 if the individual plans to become resident in 2020/21).
In particular, this will include reviewing any investment holding structures (such as trusts) to determine the UK tax consequences and whether any restructuring should be undertaken.
It may also be appropriate for the individual to seek advice on their domicile status, the availability of the remittance basis and whether a pre-arrival “clean capital” account should be established to fund their UK expenditure whilst living here. There may be substantial benefits to fully funding a clean capital account in a full tax year of non-residence (e.g. by 5 April 2020 if they become resident in 2020/21).
There are additional complexities for individuals becoming resident in the UK if they were born in the UK and have a UK domicile of origin (i.e. their father was domiciled in the UK at the time of their birth). These individuals are automatically deemed domicile in the UK on their return, being taxed on their worldwide income with no possibility of claiming the remittance basis.
Non-residents will continue to be liable to UK capital gains tax on the disposal of UK non-residential real property, including assets that derive their value from non-residential property.
Inheritance Tax Planning
Non-UK domiciled individuals are subject to IHT on their UK situs assets only. UK domiciled individuals are subject to IHT on their worldwide assets – this includes those individuals who are deemed domicile (i.e. have been UK resident for 15 of the last 20 years and those individuals who were born in the UK with a UK domicile of origin and have returned to the UK). Note that there is a one year grace period for deemed domiciled status under the IHT legislation.
The Nil Rate Band (NRB) is £325,000 for 2019/20. IHT is only payable if chargeable lifetime transfers exceed the IHT nil rate band. Any unused proportion of an individual’s NRB can be transferred to a spouse on death, so that the surviving spouse can benefit from a £650,000 NRB.
There is an additional NRB available where the deceased’s main residence is passed to a direct descendent upon death. This additional NRB is £150,000 for 2019/20, rising to £175,000 in 20/21. The relief is tapered down for individuals who have an estate worth over £2 million.
Individuals who are seeking to reduce their death estate should consider gifting assets. So long as the gift is made 7 years before the donor’s death, it will be exempt from IHT.
Individuals can also make use of the £3,000 annual gift exemption (which is increased to £6,000 for those who did not make any gifts during the previous tax year), the small gift allowance of £250 per donee, as well as making gifts in consideration of marriage (£5,000 for children, £2,500 for grandchildren and £1,000 to anyone else).
In addition, any regular gifts made from ‘surplus’ income are outside the scope of IHT. Clear documentation must be retained to prove that the gift has been made from income not needed to support the donor’s lifestyle expenses, as well as showing that the gift is regular.
A reduced rate of IHT (36% rather than 40%) is available where over 10% of the net value of an individual’s estate is gifted to charity. Advice should be taken to ensure that an individual’s will is drafted efficiently with this in mind.
Generally, income tax claims must (subject to exceptions) be made within four years after the end of the tax year to which the claim. Therefore, the deadline for claims with respect to the 2015/16 year will expire on 5 April 2020. Individuals may therefore wish to review whether all appropriate claims for the 2015/16 year have been made. Such claims may include claims for foreign tax credits or for loss relief.
Key UK self-assessment tax dates and deadlines for individuals:-
31 January 2020
- filing deadline for 2018/19 electronic returns. £100 penalty arises for individual returns not filed by this date, regardless of whether tax is due;
- payment deadline for 2018/19 tax and first payment on account for 2020/21;
- third automatic 5% late payment penalty applies to any outstanding 2017/18 tax.
28 February 2020
- first automatic 5% late payment penalty applies to outstanding 2018/19 tax.
5 April 2020
- end of 2019/20 UK tax year;
- four year time limit expires for certain claims/elections for the 2015/16 tax year.
30 April 2020
- 2018/19 paper returns not filed by this date will be 6 months late. A further penalty of 5% of any tax due (or £300 if greater) may be payable;
- 2018/19 electronic returns not filed by this date will be 3 months late. Daily penalties may apply of £10 a day for up to 90 days.
31 July 2020
- 2019/20 second payment on account becomes due;
- 2018/19 electronic returns not filed by this date will now be six months late and a further penalty may be charged of 5% of the tax due, or £300 if greater.
1 August 2020
- the second automatic 5% late payment penalty applies to any outstanding 2018/19 tax.
5 October 2020
- deadline to notify HMRC of chargeability to tax for individuals not issued a return (or a notice to file a return) by HMRC and who have a tax liability for 2019/20.
31 October 2020
- deadline for submitting 2019/20 paper return unless there is no facility available from HMRC to file electronic tax return, in which case the deadline for a paper return is extended to 31 January 2021;
- 2018/19 paper returns not submitted by this date are now 12 months late and subject to further penalty of 5% of the tax due, or £300 if greater.
31 January 2021
- filing deadline for 2019/20 electronic returns. £100 penalty arises for individual returns not filed by this date, regardless of whether tax is due;
- payment deadline for 2019/20 tax and first payment on account for 2020/21;
- third automatic 5% late payment penalty applies to any outstanding 2018/19 tax.