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Top Ten Tax Planning Tips for Individuals
26th March 2019, 8:00 am
With the end of the tax year on 5 April fast approaching, now is the time to review your tax position. Is there anything you can do to reduce your tax bill(s) for this year, or plan better for next year?
DTE Tax Partner George Lovell, together with our team of tax consultants, have collated ten must-read tips that provides you helpful tips and guidance on areas to consider to save on various types of your personal tax:
INCOME TAX PLANNING:
1. Avoiding the 60% band in income tax
Personal allowances are tapered by £1 for every £2 of income for individuals with incomes in excess of £100,000, giving an effective rate of 60% tax above this level. You may take steps to reduce your taxable income by making tax relievable pension contributions, charitable gift aid payments and controlling the timing of the receipt of income (for example dividends from family companies or bonus payments).
2. Using allowances and relief in income tax planning
Take full advantage of your annual allowances and relief by considering the following:
- Spouses and civil partners – consider transferring income generating assets so that future income is either tax free or charged at a lower rate.
- High Income Child Benefit charge – if both parents have income less than £50,000, no charge arises.
- Use gift aid donations to reduce your taxable income.
3. Income tax planning for business owners: optimising both your business and personal tax by:
- Drawing monies from the business in the most effective manner, balancing earnings and dividends to minimise tax exposure.
- Repaying loans from the company within 9 months of the end of the company’s accounting period to avoid 32.5% tax charge.
CAPITAL GAINS TAX PLANNING:
4. Using annual exemption in capital gains tax planning
When selling assets, consider the following to minimise your capital gains tax:
- Sell assets where the gain will be covered by the annual exemption before 5 April 2019.
- Defer selling assets until the 2019/20 tax year if you have already used your 2018/19 annual exemption.
- Sell assets standing at a loss to reduce current year gains otherwise taxable.
INHERITANCE TAX PLANNING:
5. Reviewing your will on a regular basis and on any significant life event.
This is because marriage or divorce will typically render any pre-existing will as being invalid thereafter. Your financial and family circumstances change over time and it is important that your will is current and reflects your wishes for both succession and tax planning. If you do not have a will then your assets pass according to the rules of intestacy and, contrary to popular belief, where you are married with children these rules mean that the surviving spouse does not automatically inherit your entire estate.
6. Planning for death to minimise inheritance tax for your beneficiari(es)
Though it is a topic none of us likes discussing, planning for death is an important matter to consider:
- Review your defined benefit pension fund to ensure that there is maximum potential for your beneficiaries to receive your pension fund as tax efficiently as possible.
- Review business assets to ensure they are structured correctly so that business property relief and/or agricultural property relief are maximised.
- Life policies may be taken out to fund an IHT exposure, provided they are written into a trust, the proceeds will not be subject to IHT on death.
7. Using lifetime allowances and reliefs to plan for inheritance tax
- Each person has a nil rate band of £325,000 before IHT is charged at 40% (20% on chargeable lifetime transfers).
- Where the nil rate band is not fully utilised on the first death, then it is passed to the surviving spouse. Therefore, following a second death up to £650,000 may be free from IHT.
- Consider passing the entire estate to the surviving spouse (free of IHT) and subsequently they may make lifetime gifts so that, if they survive for the seven year period, their gift is free from IHT and the transferable nil rate band has been fully preserved.
TAX PLANNING FOR ENTREPRENEURS:
8. Deferring capital gains with rollover relief
If you have sold, or are planning to sell assets used in your business and buy another qualifying asset within three years (or have bought one in the previous 12 months), the gain may be rolled-over. It is also available to defer the gain on the disposal of any asset where the proceeds are reinvested into a qualifying EIS company.
PROPERTY TAX PLANNING & RESIDENCE NIL RATE BAND:
9. Utilising residence nil band rate (‘RNRB’)
This relief was introduced to reduce the burden of IHT on the family home when it passes to a direct descendent. This extra allowance is being phased in with £125,000 currently available in 2018/19 per individual or £250,000 per couple. By 2020/21 the relief will be worth £175,000 per individual or £350,000 per married couple. There is a tapered withdrawal for estates in excess of £2m. The enhanced RNRB is transferable where the second death is after 5 April 2017 irrespective of when the first death occurred. You should review your will to ensure that this relief is available.
10. Taking advantage of rent-a-room relief in property tax
Rent-a-room relief for letting a room in your own home is available up to £7,500 where income is received tax free.
The above tips are for general purpose guidance only, and where appropriate, professional advice should be obtained.
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If you have questions about any of the points above, please contact us on 0161 767 1200, or email firstname.lastname@example.org.