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End of Year Tax Planning

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This guide is intended to give you an outline of many areas of tax planning that may affect you as we approach the end of the current tax year, and that you may feel you need to discuss with your advisor at Pryce Warner International Group.

INCOME TAX

This applies to UK residents, in many cases this information will be of assistance to those British Expatriates who may have certain tax obligations within the UK Tax System.

Charitable Donations

HMRC gross up any and all donations made to charity. This creates a simple way in which you can reduce your annual tax liability.

What you can do:

  • Higher rate taxpayers (earning £42 475+) can extend their tax band by the amount donated to charity. This allows them to pay more tax at the basic rate of 20%.
  • In households with more than one income, the higher rate taxpayer should make such donations.

Tax Rates

From the 6th April 2013, anyone earning over £150 000 will pay an additional rate of Income Tax of 45%. If this affects you, you should consider whether or not it would be possible to defer any income so that it would fall under the lower tax rate.

Anyone earning between £100 000 and £116 210 has a restricted personal allowance and this creates an effective rate of tax of 60% on income within this band.

What you can do:

  • Make pension contributions or charitable donations to reduce your taxable income.
  • Spread your assets more evenly between yourself and your partner.
  • Defer income into the 2013/14 tax year.

Review your investments, and consider if they would be best served generating capital growth or providing income.

Pension Planning

The maximum pension saving that can presently be made whilst still allowing tax relief is £50 000. However, this can be a complex area and our personal financial planners can provide more information based upon your circumstances.

What you can do:

  • Some individuals can carry forward any unused annual allowance from 2009/10. This would be lost if not used by April 6th 2013.
  • Stakeholder pension schemes can be established for non-earning spouses/civil partners and children or grandchildren. HMRC will gross up the maximum net payment of £2880 to £3600 each year.
  • Changes have been made to the state pension retirement age and the number of qualifying years of contributions needed to receive a full state pension. Whether or not you need to claim the state pension, it is always a good idea to double check what your entitlements are.

CAPITAL GAINS TAX

What you can do:

  • Make full use of your annual Capital Gains Tax exemption (£10,600 for 2012/13), as this cannot be carried forward into the next tax year.
  • Realise any accrued losses from assets or investments. Losses are offset against capital gains arising in the same year, and any excess losses are then carried forward.
  • Transfer assets to your spouse/civil partner if they are not utilising their annual exemption or would pay Capital Gains Tax at a lower rate.
  • The tax paid on capital gains depends on how much you earn, meaning pension contributions not only reduce your Income Tax rate, but also your capital gains tax rate.
  • If selling property, consider if the sale would expose you to Capital Gains Tax or if any form of Principal Private Residence relief would be due.

INHERITANCE TAX

What you can do:

  • When planning your inheritance remember that you can make gifts of up to £3000 per tax year. If no gifts were made in the previous year the exemption can be rolled forward for one year only.
  • Gifts of up to £250 can be made to any number of separate individuals.
  • Exempt gifts in consideration of marriage/civil partnership - £5000 can be made by parents of either party, £2500 by a grandparent or by one party to the marriage/civil partnership to the other, £1000 by anyone else. Any gifts made, in any circumstance, should be documented.
  • If larger lifetime gifts are made, these will become exempt if you live seven years from the date of transfer.
  • Review the wills you have in place to ensure that they still accurately reflect your wishes.
  • Make use of both spouse’s nil rate bands.

TAX-EFFICIENT INVESTMENTS

What you can do:

  • Make full use of your ISA entitlement. ISA’s are not subject to capital gains or income tax, and have an annual contribution limit of £11 280 on stocks and shares ISAs and £5640 for cash ISAs.
  • Junior ISAs are available to for children who do not have a Child Trust Fund. Withdrawals are restricted until age 18.
  • Significant tax relief can be obtained by investing in either an Enterprise Investment Scheme. (EIS) or Venture Capital Trusts (VCT). An investment in an EIS of up to £1 000 000 can secure Income Tax relief of 30% as well as deferring capital gains. VCT investment attracts tax relief at 30% up to £200 000, although there is no capital gain deferral available.

PENSION LIFETIME ALLOWANCE

The lifetime allowance is the maximum amount of pension savings you can accrue that can benefit from tax relief. Pension savings in excess of this allowance will face tax liabilities.

The pension lifetime allowance limit is currently £1.5m with this being reduced to £1.25m. Anyone approaching this threshold may want to consult an advisor to discuss how best to accrue pension assets beyond this level.

PENSION AUTO-ENROLMENT AND FIXED PROTECTION

Auto-enrolment is being introduced in order to make it easier for people to save for retirement. Employers must automatically enroll employees in a qualifying workplace pension scheme, if they are not in one already. It is possible that these contributions may expose you to a tax liability.

If you have registered your pension savings for ‘protection’, additional pension payments could take you over the annual allowance, thus creating a tax charge.

RESIDENCY CHANGES FOR 2013/14

Statutory Residence Test From

April 6th new rules will be in effect that determine whether or not an individual is resident in the UK. The proposed rules contain numerous exemptions and conditions and can potentially affect a large number of expats. An outline of the new rules can be found at http://www.prycewarner.com/pg-statutory-residence-test-325.html, but this is a highly complex area and personal advice should be sought immediately.

Split Domicile and Asset Transfer

It was previously the case that If a UK domiciled individual transferred assets to their non-UK domiciled spouse, an Inheritance Tax exemption of £55 000 applied on the value of the transfer. However, the ‘cap’ on these transfers will now increase to £325 000.

If this may affect you, you should carefully consider when you want to make these transfers or defer them into the next tax year if possible.

Additional changes state that whilst a death transfer from a UK domiciled spouse to a non- domiciled spouse suffers an IHT charge, from April 6th 2013 this issue can be overcome with appropriate elections when the death occurs.

PENALTIES

Penalties for late submission of Tax Returns apply even if there is no tax to pay. It is highly important that you make sure your Tax Return is filed before the deadline.

IMPORTANT DATES 2013/14

  • 5th April 2013 – End of 2012/13 tax year
  • 31st July 2013 – 2012/13 second payment on account
  • 31st October 2013 – Last day for filing paper copy of 2012/13 Tax Return
  • 31st January 2014 – Last day for filing electronic copy of 2012/13 Tax Return
  • Balancing payment of 2012/13 tax and first payment on account for 2013/14