Starting a new year by updating your plans for the future is always a good idea and, if you act now, you should be able to get things in place before 5 April.
Personal income over £150,000 is taxed at 45% (46% in Scotland) yet because of the personal allowance reduction, for income between £100,001 and £125,000 (for 2020/21) the effective top rate is 60/61%. Individuals with incomes near these thresholds can reduce their future liabilities by reducing their taxable income below £100,000 or £150,000. This can be achieved by changing income into non-taxable forms, deferring income, making some types of tax incentivised investments, making payments to charity or giving income yielding assets to a spouse/civil partner with lower income.
For example, for married couples with rental income, it is clearly sensible for the person who has the lowest income to be the recipient of the taxable rents. Where the higher earning spouse owns the property, it can be partially transferred (eg 50%) to the lower earner without triggering a capital gains tax (CGT) charge. However, a stamp duty land tax (SDLT) charge will arise on the value of the outstanding borrowing taken on by the new owner if this is over the 0% threshold. The consent of any lender would also be required.
If you have been considering investing in residential property, completing a purchase before 1 April 2021 can benefit from the temporary ‘nil rate band’ for SDLT on the first £500,000 of the purchase price (in England and Northern Ireland). This means a saving of £15,000 on a property valued at £500,000 or more, but don’t forget you would still have to pay the additional 3% SDLT surcharge if you are acquiring a second/additional property. Increases in the nil bands for property purchase taxes have also been implemented in Scotland and Wales.
Potential reforms to taxes have been the source of much speculation since the pandemic has highlighted the need to raise government tax revenues. While the introduction of a ‘wealth tax’ may seem unlikely, the UK’s current taxes on wealth (inheritance tax and CGT) may be reformed. The Office of Tax Simplification has put forward proposals for CGT reform and an All Party Parliamentary Group has published IHT reform proposals.
Part of any reforms is expected to include the removal of some current tax reliefs. Therefore, a review of your current plans for managing family wealth in the future is a good idea, if you need to use any of the current IHT or CGT reliefs, now is probably a good time to do so.
If you have a favourite charity, consider making Gift Aid donations before 31 January to provide an early benefit to the charity and elect for the donation to be treated as made in the prior tax year to accelerate tax relief. When completing your tax return for 2019/20, you can make this election for any donations made between 6 April 2020 and 31 January 2021 (or the date you submit the return if earlier).
It is always important to take specific advice on investment changes from an IFA and consider all the tax implications of your actions. For help and advice on all tax issues, please get in touch with Fiona Hall or a member of our team.
You can also download BDO's Personal Tax Planning Guide for more information.