Year-end UK tax planning
As the UK 2018/19 tax year draws to a close, UK-resident individuals should turn their attention to any pre-emptive steps which may be taken by 5 April 2019 in order to optimise their income and capital gains tax position.
Income tax planning
The marginal UK income tax is currently 45% for taxable income over £150,000, and 38.1% for dividends over this threshold. Scottish taxpayers are now subject to different rates, with a 46% rate for income (including dividends) over £150,000.
The personal allowance, exempting the first £11,850 of income, is progressively withdrawn for individuals with income over £100,000. For 2018/19, the allowance is nil when income exceeds £123,700, and a marginal rate of 60% applies to income falling between £100,000 and £123,700. In addition there is a £1,000 allowance for personal savings and £2,000 for dividends, which are 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 2018/19 than 2019/20. 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. 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 registered pension schemes can generally be claimed as a tax deduction (the “annual allowance”). The allowance 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 £123,700 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 2019 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 2015/16 since this will expire on 5 April 2019.
The total value of individuals pension pot should not exceed the “lifetime allowance” £1.03m, increasing to £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 tax at the lowest possible rate where one spouse has a lower marginal rate. Various anti-avoidance provisions need to be considered when doing this.
Capital gains tax planning
The marginal capital gains tax rates are generally 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.
A lower 10% rate may be available on up to £10million 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 businesses for which the individual works. From 6 April 2019 the conditions for this particular relief must be satisfied for 24 months before the disposal date, compared to the current required holding period of 12 months. Therefore if the sale of a business is currently being contemplated, it may be tax efficient to sell the business before 6 April 2019.
The capital gains annual exemption is £11,700 for 2018/19. 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.
Individuals should consider whether steps can be taken to crystallise gains on assets before 6 April 2019 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.
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.
If the individual has capital gains taxable for 2018/19 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.
Individuals may invest up to £20,000 per year in an individual savings accounts (“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, “Help to Buy ISA” for first time buyers, and “Lifetime ISA” for 18 to 40 year olds.
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 which 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 2019, up to £10million. Individuals who hold shares qualifying for this relief should therefore consider deferring any disposal until after 5 April 2019. 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 UK without triggering the remittance tax charge should consider “cleansing” their offshore mixed bank accounts to enable clean capital to be brought to the UK without a tax charge. The deadline for cleansing is 5 April 2019. Please refer to our separate article on this topic (click here).
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. by 5 April 2019 if the individual plans to become resident in 2019/20.
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 the 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 2019 if they become resident in 2019/20.
Non-residents will be liable to UK capital gains tax on the disposal of UK non-residential real property with effect from 6 April 2019, including assets that derive their value from non-residential property. Rebasing will apply so that only gains accruing from 6 April will be taxable.
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 2014/15 year will expire on 5 April 2019. Individuals may therefore wish to review whether all appropriate claims for the 2014/15 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 2019
- filing deadline for 2017/18 electronic returns. £100 penalty arises for individual returns not filed by this date, regardless of whether tax is due;
- payment deadline for 2017/18 tax and first payment on account for 2018/19;
- third automatic 5% late payment penalty applies to any outstanding 2016/17 tax.
3 March 2019
- first automatic 5% late payment penalty applies to outstanding 2017/18 tax.
5 April 2019
- end of 2018/19 UK tax year;
- four year time limit expires for certain claims/elections for the 2014/15 tax year.
30 April 2019
- 2017/18 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;
- 2017/18 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 2019
- 2018/19 second payment on account becomes due;
- 2017/18 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 2019
- the second automatic 5% late payment penalty applies to any outstanding 2017/18 tax.
5 October 2019
- 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 2018/19.
31 October 2019
- deadline for submitting 2018/19 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 2020;
- 2017/18 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 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 2019/20;
- third automatic 5% late payment penalty applies to any outstanding 2017/18 tax.