Nicola Sargeant, a tax manager at Henderson Loggie, shares advice on how to make the most of the tax year end and some changes for lower earners in the new tax year.
With the end of the tax year approaching now is the time to ensure you have fully utilised the reliefs and exemptions available to you as an individual. These include:
Probably the most obvious, but often overlooked, is to use up your ISA entitlement. The cash limit increased significantly from 1 July 2014, when New ISAs (NISAs) were introduced. The NISAs allow any combination of cash and shares up to a maximum of £15,000. Prior to 1 July 2014, there was a limit of £5,940 on cash investments.
As announced in the March 2015 Budget, the rate from 6 April 2015 will be £15,240 and from this date you will be able to take out your money and put it back in within the same year, without losing your ISA tax benefits – as long as the repayment is made in the same financial year as the withdrawal. (To see this and other changes announced in the 2015 Budget click here.)
Capital Gains Tax (CGT) Annual Exemption
The CGT annual exemption (£11,000 for 2014/15) is available for offsetting against capital gains arising in the same year. If unused, the exemption is lost and cannot be carried forward.
Contributions to pension funds should not be overlooked as tax relief is available, albeit there are limits to the amount of tax relief available, on payments into a pension fund.
Inheritance Tax (IHT)
The first £3,000 of annual transfers is exempt for IHT purposes. If unused, the exemption can be carried forward for use in the next year.
Small gifts of £250 to any one person are exempt from IHT.
If you are gifting cash each year, it is advisable to make full use of the above exemptions.
Tax Efficient Investments in Business Enterprise
Certain investments attract income tax relief, although there are limits to the amounts that can be invested each year. Such investments include the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT).
A qualifying EIS company must meet several criteria and be an unquoted trading company. Income tax relief is only available if the individual does not have a connection with the company. A connection would be someone that has been an employee or director or controls more than 30% of the company.
Income tax relief is given at 30% of the amount invested, up to a maximum investment of £1,000,000. The relief is given as a tax reducer and, therefore, will only reduce your income tax liability and would not create a tax repayment.
Capital gains arising from disposals in the 36 months before or 12 months after the EIS investment can be deferred. The gain deferred is then taxable when the EIS shares are sold or no longer qualify as EIS shares.
Similar to EIS but focuses on smaller companies in the early stages of setting up business in a qualifying trade. Maximum amount of investment is significantly less at £100,000 but income tax relief is given at 50%. Again, as with EIS, this reduces your income tax liability.
For SEIS subscriptions, a reinvestment relief is available for CGT on gains arising in the same year. Half of the amount invested can be used to reduce or eliminate capital gains arising in the same year.
VCTs are quoted companies investing in qualifying unquoted trading companies. The income tax relief is at the same rate as for EIS (30%) but the maximum investment is restricted to £200,000.
Another highlight to a VCT investment is that the dividend income received from VCTs is exempt from income tax.
If certain criteria are met, the sale of shares in all three of the above types of investments is exempt from CGT.
Looking ahead to the next tax year, for lower earners, there are a two changes from April 2015 that you should be mindful of: the savings income nil rate band and personal allowance transfer.
Read more helpful information on end of year tax planning both for individuals and business owners here.
Savings Income Nil Rate Band
From April 2015, the savings rate band for income tax reduces from 10% to 0%, which means individuals with savings income of less than £15,600, may not pay any tax.
This will be extended from April 2016 as announced in the March 2015 Budget. There will be no tax due on the first £1,000 (or £500 for higher rate taxpayers) of interest earned on savings.
If you expect your total income to be less than £15,600 for 2015/16 (£15,660 if born before 6 April 1938), you may be able to ask your bank to pay your interest gross (without deduction of tax). This is done by completing HMRC’s form R85 and handing this in to your bank. Unless they receive a signed R85 from you, banks are required by law to pay interest on non-ISA accounts net of 20% tax (ISA accounts are exempt from income tax and are paid gross). There are, however, some types of non-ISA accounts which are paid gross and your bank could advise on this.
HMRC also have an online tool, which can be found at http://www.hmrc.gov.uk/tools/r85/r85-2015.htm, for helping you to determine if you can apply to receive your interest gross.
If you are required to complete tax returns, any tax overpaid on your investment income can be claimed via self assessment.
If your spouse has low income, it may be worthwhile transferring part of your interest generating investments to your spouse to fully utilise both of your personal allowances and savings nil rate bands.
Personal Allowance Transfer
From April 2015, for basic rate taxpayers, it is possible to transfer £1,060 of your personal allowance to your spouse. This means that if your spouse does not use all of their personal allowance, up to £1,060 of the allowance can be transferred to you, which would result in a tax saving of up to £212. If this is of interest to you, you can let HMRC know by registering at the following link: https://www.gov.uk/government/news/registration-opens-for-new-married-couples-tax-break and HMRC will email you once it is possible to claim. HMRC have still to confirm how the transfer will operate and, hopefully, we will have more information on this soon.
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This is a sponsored article by Henderson Loggie. Find out more at hlca.co.uk.