Your end of tax year financial health check. Five tax planning ideas to consider.
We are now in the last three months of the tax year (tax years end on 5th April). Now’s the time to think of the financial planning that you might wish to carry out before that deadline. We have set out below five tax year-end financial planning ideas that you may wish to consider. If you would like to discuss tax-year-end planning, please do not hesitate to contact us. Our contact details are at the end of this article.
- Using your ISA allowance
ISA capital is free from UK income and capital gains tax, so it makes good sense to consider whether you should be making use of your annual ISA allowance. The maximum amount that can be paid into an ISA this tax year is £20,000.
There are various types of ISA, with each type aimed at meeting different objectives. Choosing the most suitable ISA is very important. We are on hand to provide advice and guidance on ISA-based financial planning.
- Making a pension contribution
Pension contribution allowances are aligned to tax years as well. A £10,000 pension contribution benefits from £2,500 of automatic tax relief, instantly turning £10,000 into £12,500. Anyone paying income tax at 40% or 45% can claim an extra 20% or 25% in income tax relief in addition.
It is even possible for a non-taxpayer to make a pension contribution and benefit from the instant tax relief.
There are limits in terms of how much can be contributed each tax year. Some people will be able to utilise unused allowances from previous tax years. Care needs to be taken, though because pension contributions are not the right course of action for everyone. We can provide advice and guidance on this. In the right circumstances, though, making a pension contribution can be the very best piece of tax planning that someone could possibly carry out.
- Annual gifts
Inheritance tax doesn’t impact on everyone’s finances but, when it does, it can dramatically reduce how much wealth can be passed on to loved ones. If inheritance tax is a potential threat to your finances and a threat that you would like to try to do something about we can most certainly provide you with advice on this complex area of financial planning.
There is a vast array of inheritance tax-based strategies to consider. Quite a few of the strategies rely on you living for a number of years after you have instigated the financial planning. That should not put anyone off considering such options. Quite the reverse. The earlier you start such financial planning, the more chance of you living the required number of years! But each strategy comes with its own complexities and the pros and cons of each one need to be carefully considered.
However, each tax year you can carry out some very simple inheritance tax planning that is guaranteed to work with immediate effect. We can each gift £3,000 per tax year, knowing that it is immediately ‘off the radar’ for inheritance tax purposes. If you did not make such a gift in the previous tax year you can ‘double up’ the allowance to £6,000. For example, two parents who didn’t make gifts last tax year could jointly gift £12,000 to their children before the end of the tax year, potentially saving £4,800 in inheritance tax (£12,000 X 40% inheritance tax). There would be nothing to stop them making a further £6,000 gift on the first day of the new tax year as well; another £2,400 of potential inheritance tax saved.
The £3,000 annual gift allowance is not the only exempt gift allowance, so it might be worthwhile considering whether further inheritance tax planning can be carried out this tax year that will be immediately ‘off the radar’. We can advise you on this and would be delighted to provide you with advice on the broader inheritance tax-based strategies that you could consider,
- Capital gains tax planning
As its name suggests capital gains tax (CGT) is a tax on gains, i.e. the growth in value of certain assets or investments. If you encash investments such as shares or investment funds* or sell an investment property this is a disposal for CGT purposes, meaning that CGT might be payable. But we have an annual CGT allowance that means that some gains will be tax-free. The CGT allowance for the current tax year is £12,300.
Let’s assume you invested £50,000 into an investment fund* five years ago and it is now worth £74,000. If you encashed the investment, the first £12,300 of the £24,000 gain would be tax-free (assuming this is the only disposal that you make in the tax year). The balance of £11,700 would be subject to CGT and this will be at either 10%, 20% or something in between.
*Not all investment funds are subject to CGT. They may be subject to other forms of taxation.
But you could encash 50% of the investment this tax year, triggering 50% of the gain (£12,000) and suffer no CGT because it falls within the CGT allowance. You could encash the other 50% at the beginning of the next tax year and end up paying no CGT whatsoever.
For jointly owned investments, two CGT allowances will be available (assuming no other disposals in the tax year) meaning that £24,600 of gains could be released this tax year without any CGT becoming payable.
We can provide you with guidance on CGT planning. It is tax planning that we carry out for many of our clients from one tax year to the next to ensure that their investment planning remains highly tax-efficient.
- Married couple’s allowance
Did you know that if you are married or in a civil partnership you might be able to transfer 10% of your personal income tax allowance to your spouse/civil partner? This allowance is currently £12,570 and 10% of it can be transferred where one of you is a non-tax-payer and the other is a basic-rate taxpayer. The tax saving this tax year can be as much as £250. What’s more, you can claim for the last four tax years as well. That oldest tax year will fall out of the reckoning, though, as soon as we enter the next tax year, so you should be considering this tax planning now.
As financial advisers, understanding taxation is part and parcel of what we do. In this short article, we have only just scratched the surface of tax-based financial planning and this information should not be regarded as personal financial advice. We provide advice on a wide range of tax planning alongside advising on investment and wealth management strategies.
For further information or to discuss any of the above, or obtain financial advice for your personal circumstances, please contact Sally Jackson at HFL Financial Advisers on 07949 792642 or email@example.com
The information contained in this article is provided in good faith. Whilst every care has been taken in the preparation of the information, no responsibility is accepted for any errors which, despite our precautions, it may contain.
HFL Financial Advisers Limited is an Appointed Representative of Lyncombe Consultants Limited which is authorised and regulated by the Financial Conduct Authority.