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Marcia Banner, Financial Planning Week tip: Tax planning considerations for property investors in the current climate

The pros and cons of personal versus corporate ownership of buy-to-let property and how the position has been affected by the recently announced changes to corporation tax and income tax rates.

While the Chancellor’s Growth Plan (and subsequent U-turn on the abolition of the additional rate of tax) may have inadvertently sparked a (temporary?) hike in interest rates, it’s not all bad news for buy-to-let property owners and investors who don’t need to borrow to finance their property investments.

The increase in the nil rate threshold for Stamp Duty Land Tax (SDLT) to £250,000 benefits not only those replacing their main residence, but also carries through to purchasers of additional residential property who pay SDLT at the standard residential rates plus a 3% surcharge. This is because the extension of the nil rate threshold also extends the 3% rate threshold. This will deliver a £2,500 SDLT saving on new purchases of additional residential property worth at least £250,000 completing on or after 23 September.

Property investors who are buying property via (or thinking of transferring existing residential property to) a company will also benefit from this SDLT saving and this may increase interest in using companies to hold property investments – especially as the planned increase in the corporation tax rate (from 19% to 25%) – which would have affected companies with profits (net annual rental income) of more than £50,000 – has now been reversed. 

An ‘accumulation-stage’ investor who is still buying property and building their portfolio may also be in a position to make a loan to their company to fund the property purchase which would pave the way for tax-efficient extraction of accumulated rental profit at a future date; but where the property investor has already amassed a substantial personally-owned property portfolio there are a whole host of “tax factors” that need to be considered before deciding whether to transfer to a company or to retain the properties in individual ownership. 

Main considerations on transferring existing properties to a company

Assuming that the properties are not mortgaged (mortgages can create other complexities) the main considerations will be capital gains tax (CGT) and SDLT.

The transfer of one or more properties to a company will be a disposal for CGT and the property owner will therefore usually need to pay CGT on the difference between the market value at the time of the transfer and the acquisition cost of the property, unless incorporation relief can be claimed.

Incorporation relief can be claimed to defer the payment of CGT only if all of the conditions of s162 Taxation of Chargeable Gains Act 1992 are satisfied – including the need for the individual to be operating as a business. HMRC will generally accept this to be the case if the property owner is dedicating around 20 hours a week of personal time to the management of the property letting, but this is often going to be difficult – especially if the owners are past retirement age and winding down or the property investor has a full-time job.           

Where residential property is transferred to a connected company, SDLT will also be payable by the acquiring company on the market value of the property at the time of transfer at the higher rates applicable to purchasers of additional properties (although multiple dwellings relief may be available to reduce the charge if more than two properties are transferred in the same transaction). While the SDLT bill is now, as we have already noted, going to be marginally less than it would have been for transactions completing prior to 23 September, let’s not forget that the individual may have already paid SDLT on the purchase price at the higher rates when they bought the property.

An exemption from the SDLT charge on incorporation is available where the transfer is made from a partnership to a company owned by the same individuals. However, the partnership must be a genuine partnership that is registered with HMRC and that has subsisted for a reasonable amount of time. Joint ownership, in itself, is insufficient and HMRC may seek to challenge claims for relief in cases where the partnership has been in existence for only a short period (as a ‘rule of thumb’ less than three years) and/or there seems to be no other genuine commercial reasons for establishing the partnership.

But that aside….

Where SDLT and CGT costs can be mitigated or are not prohibitive, transferring property into corporate ownership can provide considerable tax benefits to those who wish to build up a portfolio of properties over time and use it to generate income in later life. This is largely due to the fact that the company will pay corporation tax at just 19% on rental income net of deductible expenses (including mortgage interest) as compared to the 40%/45% rate of income tax that could be payable on the rental profits if the property was held personally. As a consequence, where the taxed income is saved and reinvested in further properties, the company will be able to build the portfolio much more quickly than an individual investor could do – and the additional income that a larger portfolio will generate will provide an overall higher net return for the client in retirement, even after allowing for the extra tax at shareholder level. The reinvestment of the additional net income receivable through using a company over time may also eventually produce a sufficiently improved position to compensate for the disadvantages of realising residential property gains within a company structure and suffering a second layer of tax when extracting the net sale proceeds.

It is, however, important to appreciate that the company route will rarely be beneficial if the property investor is planning to extract the company rental profits. Not only will the investor lose out on the compensatory portfolio growth that accumulation and reinvestment within the corporate wrapper will bring, (unless they have made a loan to the company to finance the property purchase), the profit will usually need to be extracted in the form of a dividend, meaning that there is going to be additional tax at shareholder level. While this will improve post 6 April 2023 (when the tax rates on dividend income will fall) this element of double taxation still means that the client who intends to extract all the rental profit from the company as a dividend will often be better off keeping the properties in individual ownership.

What about inheritance tax?

Shares in a property investment company don’t tend to qualify for the reliefs available in respect of shares in trading companies so the value of these shares will form part of the client’s taxable estate for inheritance tax (IHT) purposes unless they give them away during their lifetime. The value of the shareholding will broadly reflect the value of the company’s net assets (so a shareholder who has also made a loan to the company – and has an outstanding amount as an asset of their estate – won’t be taxed twice).

Of course, as the properties grow in value, so will the value of the investor’s shareholding but, fortunately, estate planning with company shares is a lot easier than estate planning with property. A gift of shares, if made outright, will be a potentially exempt transfer (PET) which means that an immediate liability to IHT will never arise regardless of how much value is gifted at once. And if the gifted shares don’t carry voting rights, the PET can be made without necessarily giving the recipient immediate access to the underlying value. It should be remembered that a gift of shares will also be a disposal for CGT purposes, but as long as any planned gifts are made shortly after incorporation, any gain should be covered by the shareholder’s annual exemption.      

Conclusion

It will be clear that there are a lot of different factors to bear in mind when considering whether to hold property investments personally or within a company structure but, in summary, the company ownership approach tends to work best with new properties (or existing properties where SDLT and CGT can be mitigated or deferred) and where the client isn’t likely to need to start withdrawing the rental income for many years. An exception to this rule might be where the property investor is a higher rate taxpayer with significant finance costs – in these cases using a property investment company can sometimes yield savings even if the higher rate taxpaying residential property investor is extracting all their company’s after-tax profits. This is because, unlike individuals, a company is still able to deduct mortgage interest from gross rental income in order to arrive at their taxable profit.

There are also other factors specific to the individual client circumstances and objectives that could swing the balance one way or the other and it will therefore be vital for the client to take independent tax advice before making a decision or pursuing any particular course of action.                                

Simon Martin, Financial Planning Week tip: Corporate investing – creating an income in retirement

An outline of the opportunities that apply to company shareholders.

Many of our financial planning clients who own a SME business, ask the question “what should I do with surplus capital owned by the business?”

For many, the tax efficiency of extracting money via a pension makes this the default recommendation. But what about our clients who are limited in their ability to make a pension contribution due to the annual or lifetime allowance?

Where these clients have surplus capital within the company, and a concern about both low interest rates and higher inflation, investing within the company can make sense. Using an equity-based collective investment allows the gains to be deferred until surrender and the dividends to effectively be paid tax-free to the company as “franked income”.

Over the long term, history shows equity investing gives a great opportunity to achieve returns greater than inflation. Structuring the investment in a tax efficient manner increases the attractiveness even more. As the investments remains owned by the company, the funds can be used for future business purposes where required.

The potential advantages of corporate investing are clear; however, the question remains as to how the money can be extracted from the business in a tax efficient manner.

Planning opportunities – retain the company

One option is to retain the investment within the business after the company has stopped trading and treat the company as an investment company. The shareholders can then draw the dividends during retirement from the now investment company until they are exhausted. This is especially attractive for a company that could not be sold, such as a consultancy company.

Typically, an investment company will not qualify for capital gains tax Business Asset Disposal Relief (BADR) or inheritance tax Business Relief. However, drawing the funds as income means there will never be a capital event and therefore the loss of BADR is inconsequential. In addition, where the capital is drawn and spent during the owner’s lifetime, Business Relief becomes less relevant.

Your client, the owner of the business, and potentially their spouse/civil partner would be able to use the dividend income from the company, once they finished trading, to fund retirement. Each spouse/civil partner could use their £12,570 personal allowance and £2,000 dividend allowance with the remaining income in the basic rate taxed at just 8.75%.

Note that when a company declares a dividend, the proceeds must be split equitably, according to the number of shares each shareholder owns at the time. So, for example, two 50% shareholders, holding the same type of shares, would each receive the same level of dividends. Also, a dividend is a payment a company can make to shareholders if it has made a profit. A company must not pay out more in dividends than its available profits from current and previous financial years. For more information please see Dividend payments by a company.

Assuming each spouse/civil partner took an income up to the basic rate tax threshold, they could extract £100,540 annually (£50,270 each) with a tax rate of just over 6%, lower even than the 10% BADR rate which may have otherwise been available.

Having the additional income can create several opportunities for our clients, including retiring before the State Pension is available or simply providing a greater income during the early retirement years where the client’s expenditure is often higher.

In addition, this allows our clients to leave their tax efficient pension funds invested for longer before drawing down the funds, increasing the value of the inheritance tax efficient assets they hold.

Retaining the company structure also provides the opportunity to gift shares to the next generation as part of an intergenerational plan.

Comment

Whilst corporate investing is an important part of an SME financial plan, consideration of exit is equally vital and should be discussed with your client alongside their other professional advisers.

Karen Searle, Financial Planning Week Tip: Closing the protection gap in a cost crisis

Why good financial planning should be all about protecting what you already have.

You will have been hard pressed over the last few weeks and months to miss the daily headlines around the “cost of living crisis” currently sweeping the UK.

What do we mean by ‘cost of living crisis’ – and why is it happening?

A “cost of living crisis” simply refers to a scenario in which the cost of everyday essentials like energy and food is rising much faster than average incomes.

A rapid increase in energy costs, particularly the wholesale price of gas, has been a key driver of the recent increases in inflation. Housing and household services (which include electricity and gas) and transport (which includes motor fuels) contributed to over half of annual CPIH (Consumer Prices Index including owner occupiers’ housing costs) inflation in July 2022.

Although increases began in early 2021, this year is likely to be remembered for the sharpest drop in household incomes on record, thanks to a dramatic surge in inflation.

In 2022, all food prices are now predicted to increase between 8.5% and 9.5%. This means that conversations around keeping food on the table and a roof over your client’s heads are more important than ever before.

Our role as financial advisers is key in having the conversations and talking protection in order to protect a client’s financial world and put in place an affordable robust structure of cover across the key areas of life cover, critical illness and income protection whether on a personal basis or as business protection.

So, how do we talk protection in a cost crisis?

With inflation up and the real value of wages down, maximising your client’s spending power and educating them on how to channel their money to best effect is paramount.

Our biggest role at the moment is to educate our clients:

  • Go through accurate budgeting with your clients, including looking through bank statements – review standing orders and direct debits to identify any areas that could help save them money.
  • Help them make honest decisions around where they spend their money to get the best value.
  • Have open conversations regarding their finances, needs, concerns and goals.
  • Encourage them to plan and consider the impact of “what-if” happening.
  • Think about the messages we give to our clients and the language we are using around budgeting, pricing and value.
  • Re-affirm and remind clients why they had put the cover in place originally and the financial hardships it is there to prevent.

If your client has existing policies in place for life cover, critical illness or income protection, try to focus on the value of this and not focus on the actual cost. Instead, highlight the potential cost of not having it.

Adviser attitude and approach is as important as the client’s.

Tax, benefits and electricity bills

The impact of rising electricity bills has seen two important responses.

The latest projections from Cornwall Insights are that the utility price cap (which is actually a rate cap) will rise from the current £1,971 to £3,582 in October 2022 and then £4,266 in January 2023, when the Ofgem recalculation moves to a quarterly basis. At the time of Rishi Sunak’s May statement on utility price cap support the October figure was projected to be £2,800 and expected to last through until April 2023.

If you consider the utility cap cost for 2022/23, then in May, crudely, it looked to total £2,389 ([£1,971 + £2,800]/2). It is now – equally crudely – £2,948. That crude calculation, while not uncommon, understates the true difference as energy consumption in April-September is much less than in October-March. It also hides the fact that, within the cap, the gas cost (more heavily used in October-March) is projected to rise faster than electricity in October.

The Labour Party recently announced its support for a freeze in the cap until April 2023, a move already proposed by the Liberal Democrats and the Scottish Nationalists. The cost of the measure would be £29 billion for the six months according to Labour. Its funding of the proposal is not fully clear, but Keir Starmer, the Labour leader, told the Today programme on Radio 4 that he would backdate the current Government’s North Sea oil & gas windfall tax to January and remove the associated investment allowances. The planned £400 subsidy for all energy bills, announced in May would fall away as unnecessary. The cap freeze would also reduce inflation, thereby reducing the revaluation cost on £550 billion of index-linked gilts, although the suggested cut of 4% in inflation would only be a deferral unless the freeze were continued into 2023/24.

Coincidentally, on the same day as Labour’s announcement, the Institute for Fiscal Studies (IFS) issued an observation on the utility price cap. It noted that the May package, in overall terms, would have covered about 75% of the increase in the cap, assuming a £2,800 level, at a cost of £24 billion. To maintain the same proportion of support based on the latest projections would need an additional £12 billion. The IFS suggests several ways of distributing this extra sum, including increasing the £400 subsidy to £660 as a starting point before addressing low-income and vulnerable groups.

The IFS also highlights the issue of the timing of the benefit increase calculations. These use the September CPI, so, for the increases that will apply from April 2023, will miss both the October 2022 and January 2023 utility cap rises. The Bank of England projects a little over 13% as the inflation rate in 2022 Q4, while Goldman Sachs, using more recent price cap figures, sees 14.4% as a peak at the start of 2023. After abandoning the Triple Lock for this April’s increase, the optics for next April’s benefit price protection look set to be similarly bad.

Comment

Current rumours focus on an Emergency Budget announcement on 21 September, a little over a fortnight after the new Prime Minister is named and the day before the House of Commons rises for its Conference Recess. Whoever gets the job, she (or he) faces a rapid first test in squaring campaign rhetoric with economic and fiscal reality.

HMRC consults on low income trusts and estates

HMRC is consulting on legislative proposals to remove trusts and death estates with small amounts of income from income tax

Back in 2016, following tax on bank and building society interest no longer being deducted at source, HMRC introduced an arrangement to ensure that new burdens did not arise on those managing trusts and estates whose only income consists of small amounts of savings interest. This reflected the fact that following the introduction of the Personal Savings Allowance from the same date, around 95% of savers were expected to be no longer liable for tax on this interest.

However, trustees of trusts and personal representatives (PRs) of death estates do not have tax allowances in the same way as individuals do. As a result, with the payment of interest gross, even the trustees and PRs of the smallest trusts and estates would have become liable to file a self-assessment return when they hadn’t previously had to do so. HMRC’s arrangement therefore removed trustees and PRs from income tax where the only source of income for the trust or estate is savings interest and the tax liability is below £100. This arrangement was intended to be a temporary arrangement pending a longer-term solution.

The new consultation, which runs until 18 July 2022, seeks views on proposals to formalise and extend that concession.

Under the latest proposals, low-income trusts and estates with income from any source up to a ‘de minimis’ amount (to be decided following this consultation) will not be subject to income tax on that income.

For trusts and estates with income more than the de minimis amount, income tax will be due on the full amount of income rather than only applying to the income above the de minimis amount. This is in the interests of simplification for both taxpayers and HMRC, as the rules required to take the alternative approach would be complicated and require additional administration for all involved.

Tax pools apply to discretionary trusts and keep track of income tax the trustees pay. When trustees make a discretionary payment of income it is treated by the beneficiary as if income tax has already been paid at the trust rate (currently 45%); and the trustees must have paid enough income tax (in the current or previous years) to cover this ‘tax credit’. Under these proposals, even where discretionary trusts would be covered by the de minimis rule, they will still have to pay tax when they pay income out to a beneficiary, to ensure that the tax credit remains funded.

HMRC’s impact assessment points out that this measure is expected to have an impact on an estimated 28,000 individuals overall. It is expected to simplify the administration of tax in the majority of cases by avoiding the need for people to claim refunds; but some people are expected to have to return and pay the tax due, where previously that would have been done by the trustees.

We will update you on any developments.

Comment

Note that non-taxable trusts are required to register on the TRS. All trusts which are not “excluded trusts” have to be registered by 1 September 2022 or within 90 days from the trust’s creation, whichever is later. Any new registrable trusts set up from 1 September 2022 will have to be registered within 90 days. So, even if a trust does not need to register as a taxable trust, it may still need to be registered as a non-taxable trust (unless it is an excluded trust).

Tax year end planning checklist for individuals – 2021/22 tax year

A handy checklist of suggested planning considerations for individuals for the end of the tax year.

Introduction

As well as considering tax planning for the current tax year, it’s important to put in place strategies to minimise tax throughout the next tax year. The majority of planning strategies have greatest effect if implemented before a tax year begins.

This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2021/22 tax year and to plan ahead for 2022/23. 

However, while tax planning is an important part of financial planning, it is not the only part. It is essential that any tax planning strategy that is being considered also makes commercial sense.

Suggested planning points for consideration

Income tax 

  • Reduce taxable income below £150,000 to avoid 45% tax. Pension contributions are one of the few ways to reduce taxable income.
  • For married couples / civil partners, ensure each has sufficient income to use their personal allowance: £12,570 in 2021/22. This will remain at that level until 5 April 2026. 
  • The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000. If income is above £100,000, then individual pension contributions before 6 April 2022 can reduce income to £100,000 to restore all or part of a 2021/22 personal allowance which would otherwise be lost.
  • Reinvest in tax free investments, such as ISAs, to replace taxable income and gains with tax free income and gains, or investment bonds that can deliver valuable tax deferment.
  • Investments delivering tax free, or potentially tax free, and/or tax deferred, income, can be beneficial for an individual in contrast to an income producing investment which might otherwise result in an erosion of personal allowances. Note that once an investment bond gain is triggered, for example, by encashment, it is included in an individual’s income without top slicing when assessing entitlement to the personal allowance.
  • Redistribute investment capital between spouses / civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond.

    Any transfer must be done on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.

Capital gains tax

The term “capital gains tax planning”, in this context, means the taking of action ahead of, or at the time of, the disposal of an asset to eliminate or reduce a current or future liability to capital gains tax. This may involve one or more of the following:

  • timing of the transaction, e.g. bringing the transaction forward or delaying it;
  • ensuring that full advantage is taken of all available exemptions and reliefs;
  • depending on the personal objectives of the taxpayer, prior transactions such as a transfer to a spouse / civil partner or the use of a trust;
  • using the annual exempt amount; and
  • making full use of any available losses.

Capital gains tax planning:

  • Maximise use of this year’s annual exemption (currently £12,300). Any amount unused cannot be carried forward – “use it or lose it”.
  • To defer the payment of tax for a year, make a disposal after 5 April 2022.
  • To use two annual exemptions in quick succession, make one disposal before 6 April 2022, and another after 5 April 2022. 
  • Try to ensure each spouse / civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses / civil partners to facilitate this.

Any such transfer must be outright and unconditional. In transactions which involve the transfer of an asset showing a loss to a spouse / civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss). 

It should also be borne in mind that a return in respect of the disposal of a residential property (e.g. a buy-to-let property) has to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account has to be made at the same time, if the completion date was between 6 April 2020 and 26 October 2021; 60 days for disposals completed on or after 27 October – please see HMRC’s guidance. 

In July 2020, the Chancellor asked the Office of Tax Simplification (OTS), to carry out a review of capital gains tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. Based on the first report published by the OTS on 11 November 2020, it was thought that the Government might look to introduce proposals, such as taxing capital gains at the same rates as income and reducing the annual exempt amount. However, no such announcements were made in the March 2021 Budget. Instead, the Government announced that the annual capital gains tax exemption would be frozen at £12,300 until 5 April 2026. And, on 30 November 2021, the Treasury issued the Government’s formal final response to the OTS reports, as part of the publication of its ‘Tax administration and maintenance’ package. It did not accept any of the tax changes suggested by the OTS in its first report, saying: “…these reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC”. It added that “The Government will continue to keep the tax system under constant review to ensure it is simple and efficient”. The Treasury has, however, accepted five of the 14 OTS recommendations in the second OTS report, which deal with practical and administrative issues.

So, after nearly four years of uncertainty, the work of the OTS on capital gains tax can now mostly be forgotten, at least until after the next election.

Inheritance tax

  • Everybody has an annual exemption of £3,000 to use each tax year. Any unused annual exemption can be carried forward for one year only. So, use any available annual exemption carried forward from last year before 6 April 2022.
  • The annual £250 per donee exemption cannot be carried forward. A person can make as many outright gifts of up to £250 per individual per tax year as they wish free of inheritance tax, provided that the recipient does not also receive any part of the donor’s £3,000 annual exemption.
  • For those who have income that is surplus to their needs, it may also be appropriate to establish arrangements whereby regular gifts can be made out of income in order to utilise the normal expenditure out of income exemption. An ideal way of achieving this is to pay premiums into a whole of life policy in trust to provide for any inheritance tax liability.

The OTS recently produced two reports on the simplification of inheritance tax. While the first OTS report looked at administration, the OTS’s second report was focused on the structure of inheritance tax, including suggestions to revamp annual exemptions and review the interaction of the capital gains tax uplift and inheritance tax business relief on death.

No such changes were announced in the March 2021 Budget. Instead, the Treasury accepted the OTS proposal to relax reporting regulations for non-taxpaying estates. And the Government issued a further response as part of the ‘Tax administration and maintenance’ package published on 30 November, in which it said: “…the  Government has  decided not  to  proceed  with  any  changes  at the  moment,  but  will bear  your very valuable  work  in mind  if  the  Government  considers  reform of  IHT  in the  future”. So, the work of the OTS on inheritance tax can now also mostly be forgotten.

However, the Government did announce that the inheritance tax nil rate band and residence nil rate band would be frozen at £325,000 and £175,000 until 5 April 2026, and the residence nil rate band taper will continue to start at £2 million. Therefore, as wealth continues to rise, planning to mitigate inheritance tax should be started as early as possible.

And clients that can afford to make substantial gifts out of income may like to get that planning up and running sooner rather than later in case any rule change occurs in future – in the hope that if a rule change does occur, existing arrangements will be protected.

Savings and investments 

Savings income and dividends 

  • For married couples / civil partners ensure each has sufficient savings income to use their £500 or £1,000 personal savings allowances, and sufficient dividends to use their £2,000 dividend allowances.
  • Those able to control the amount of dividend income they receive, such as shareholding directors of private companies, could consider paying themselves up to £2,000 in dividends in tax year 2021/22.
  • The 0% starting rate band for savings income of £5,000 is available on top of the dividend allowance and personal savings allowance. It reduces £1 for £1 by all non-savings income over the personal allowance, so in 2021/22 people are not able to take advantage of this starting rate band where earnings and/or pension income exceeds £17,570. However, if a person does qualify, ensure they have the right type of investment income (e.g. interest) to pay 0% tax.
  • Where interest is due just after 5 April 2022, closing an account just before the tax year end can bring that interest forward to the 2021/22 tax year, which, for example, may help in making better use of any surplus personal savings allowance or nil rate starting (savings) band for the current tax year.

ISAs and JISAs 

  • Annual subscriptions (£20,000 and £9,000 respectively) should be maximised before 6 April 2022 as any unused subscription amount cannot be carried forward. The annual ISA and JISA subscription limits remain at £20,000 and £9,000 for 2022/23.

EISs/VCTs

  • For subscriptions to be relieved in tax year 2021/22 they must be made before 6 April 2022:
    • EISs – Up to £1 million can be invested; £2 million where any amount above £1 million is invested in knowledge-intensive companies. Maximum income tax relief is 30%. Unlimited capital gains tax deferral relief – provided some of the EIS investment potentially qualifies for income tax relief. To carry back an EIS subscription for tax relief in 2020/21 it must be paid before 6 April 2022.
    • VCTs – Up to £200,000 can be invested. Maximum income tax relief is 30%. No ability to defer capital gains tax, but dividends and capital gains generated on amounts invested within the annual subscription limit are tax free.

It is essential that would-be investors are aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax reliefs offered by EISs and VCTs.

 Investment bonds 

  • Investment bonds can deliver valuable tax deferment. To minimise taxation on encashment, consider deferring the encashment until later tax years, if other taxable income is likely to be lower, or nil, or the investor is a basic rate taxpayer. In the meantime, if cash is required, the investor can use the 5% tax-deferred annual withdrawal facility.

    (Alternatively consider assigning, transferring, the bond, outright, to an adult basic rate or non-taxpaying relative before encashment.)
  • Or, it may be worth triggering a chargeable event gain before the end of this tax year, by full encashment/surrender, so that the liability to tax falls in 2021/22, if the taxpayer anticipates that their top tax rate in 2022/23 will be greater than this year’s.

    (Note that the timing of the chargeable event depends on the way in which the chargeable event gain is triggered. Chargeable event gains in respect of partial withdrawals are triggered at the end of the policy year, whereas chargeable event gains on full policy encashments/surrenders are triggered on the actual date of the event.)

Pensions

  • The carry forward rules allow unused annual allowances to be carried forward for a maximum of three tax years. This means that 5 April 2022 is the last opportunity to use any unused allowance of up to £40,000 from 2018/19.
  • In 2020/21, the Chancellor added £90,000 to the two income thresholds that govern the tapering of the annual allowance. So, in 2021/22, the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000 respectively. These levels should mean that fewer pension members will be impacted by the tapered annual allowance from 2020/21 onwards, than in earlier years. This means more pension savings and the possibility of avoiding a tax charge.

    For high earners, however, it’s still important to check if they are likely to be subject to the tapered annual allowance and whether there is anything, they can do about it. If the client has sufficient carry forward and their threshold income is only just above £200,000 for 2021/22, making additional individual pension contributions could reinstate their whole 2021/22 annual allowance.

    Note that the minimum the taper can take the annual allowance down to is £4,000 from 2020/21 onwards, a reduction from the previous £10,000. This will not have an impact on earlier tax years, and it will not affect the amounts of unused annual allowance available for carry forward from tax years prior to 2020/21.

  • The personal allowance reduces by £1 for every £2 for those with adjusted net income in excess of £100,000. This means that, for 2021/22, there will be no personal allowance available once adjusted net income exceeds £125,140. Making extra pension contributions not only increases pension provision, but for those who may be subject to a reduced personal allowance a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, more with salary sacrifice.
  • In addition to helping high earners gain back their personal allowance, pension contributions can also help families get back their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000. Benefit is totally lost when income reaches £60,000.
  • The changes to the death benefit rules on pensions from 6 April 2015 should have prompted a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If this has not been done, now is the time. In theory a person’s pension plan could provide income for future generations, as beneficiaries will be able to pass the remaining fund to their children and so on down the line.
  • Individuals should consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings. The £720 basic rate tax relief added by the Government each year is a significant benefit and the earlier that pension contributions are started the more they benefit from compounded tax-free returns.
  • In the March 2021 Budget, the Government announced that the lifetime allowance will be frozen at £1,073,100 until 5 April 2026. Individuals who have funds close to or exceeding the lifetime allowance may need to review any previous decisions in respect of continuing to fund their pensions and or deferring crystallising their benefits based on the expectation of inflationary increases.

Hannah Coffey, Financial Planning Week tip: Vulnerability considerations

As Financial Planning Week is once again upon us and we are reminded of the importance of the financial sector to help clients clarify their goals and to create a plan to achieve these goals, we should also, this year, be considering the vulnerabilities of clients – not only as a result of the Financial Conduct Authority (FCA) guidance produced earlier this year, but also, of course, as a result of the pandemic and this ‘New Normal’ we find ourselves in.

It has always been important to ensure that we understand clients as part of a holistic approach. But what they want, what’s important to them, their goals and their aspirations, may well now be quite different to how they were 12-24 months ago. In addition to this, we are made increasingly aware of the vulnerabilities, or potential vulnerabilities, clients may be facing – and how these vulnerabilities, if not identified and responded to appropriately, could lead to detrimental consequences for clients.

The statistics from the FCA’s Financial Lives survey show that more adults in the UK display at least one characteristic of vulnerability than those who don’t – at 53%. With many of these adults having multiple characteristics of vulnerability, it’s unsurprising that protecting the vulnerable is a key focus for the regulator and the industry.

If a client, new or old, appears anxious or stressed – why might this be? Have they no confidence or previous experience with financial services? Has their circumstance changed to substantially impact financial security? Are they perhaps facing something entirely different – a health concern, or deterioration in themselves or a loved one?

Familiarising ourselves with the four key drivers as identified by the FCA:

  1. Health,
  2. Life events,
  3. Resilience,
  4. Capability,

is the first step to ensuring we treat clients fairly and that we arm ourselves with the correct alternative solutions for each individual client.

Tax Year Start Planning

The opportunities for tax year start planning.

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The Non- Financial Benefits of Advice

A summary of some of the key findings from the ILC research on the value of advice

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Tax planning for business owners under a Labour government

Potential tax planning implications of the Labour manifesto proposals on, corporation tax income tax and capital gains tax.

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