Taxation information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. It should also be noted that tax advice which contains no investment element is not regulated by the Financial Conduct Authority.
Income tax is imposed on individuals depending on the total amount of income generated during the fiscal year. Assuming you are UK resident, you will be taxed on your worldwide income.
In the UK each individual has a personal allowance of £11,850 (2018/19) where no tax is due and this allowance is usually increased each year.
Between this personal allowance and the start of the higher rate tax bracket threshold of £46,351 (2018/19) the basic rate of tax is applied at 20% (2018/19). Above this level the rate is 40%.
However, once the taxable income goes above £100,000 the personal allowance tapers off. The effective marginal rate goes up to 60% until the allowance is exhausted at £123,700, (£100,000 + £11,850 x2) where the rate drops back down to 40%.
Above £150,000 the rate increases again to 45% and this is termed the additional rate.
Ways to minimise Income Tax
The aim is to try to not cross over into a higher tax bracket. This can be legally be done by the following:
- ▲ Invest into a pension
- ▲ Giving money to charity
- ▲ Transferring income generating assets to a spouse
- ▲ Investing into a EIS, SEIS or VCT
Individuals are entitled to a CGT annual exemption, this is increased each year. In 2018/19 the allowance is £11,700 and trustees allowance is 50% of the individual annual allowance.
If you think that your investments have made substantial unrealised gains and you have not yet made use of your CGT annual allowance, you should consider taking financial advice as you may be able to utilise your annual allowance, or similar. You could, for example, consider reinvestment in an ISA (subject to the ISA limits), reinvestment via a spouse/civil partner or reinvestment into a similar holding.
Consideration should be given to transferring assets between spouses/civil partners before encashment to enable each to use their annual allowance.
It is important to consider whether any investments have made a loss and whether excess gains could be offset by any losses. Losses can be carried forward indefinitely, so it is important to include gains, losses and the annual exemption in any calculation to determine how to maximise relief.
Ways to minimise CGT
Most individuals do not use their allowances.It is good practics to '"crystallise" your gains during the financial year. Also by transferring assets to a spouse you can use their allowance.
In the Summer Budget 2016, the rules on Inheritance tax changed, providing for an additional "family home" allowance where an individual's main residence forms part of their estate. In 2018/19 while the Inheritance Tax threshold remains unchanged on 2017/18 levels at £325,000, the family home allowance has increased from £100,000 to £125,000. Individuals can now pass on assets - which include the family home - to their children or grandchildren worth up to £450,000 (£325,000 + £125,000), with no Inheritance tax liability.
Certain lifetime gifts can be made without giving rise to an inheritance tax charge. For 2018/19 the annual gift exemption is £3,000 and it is worth considering making a gift of this amount if you are in a position to do so.
In addition, if you did not make use of any part of the £3,000 annual gift exemption to which you were entitled for in the previous year, then this can be utilised before the end of the next. Please note that any unused allowance for the earlier tax year must be used before the current year's allowance. It can only be carried forward for one year and then, if unused, it is lost.
Unlimited gifts can also be made in the form of Potentially Exempt Transfers (PETs). Provided you live for 7 years after making the gift, it will be free of inheritance tax.
Please ensure that, should a gift be made by cheque, sufficient time is given for the cheque to clear before 5th April; otherwise it will not be included in the current year's total.
Gifts of £250 can be made to any number of separate individuals without giving rise to an inheritance tax charge. Gifts of varying amounts can also be made between family members on the occasion of a wedding/civil partnership ceremony, without any inheritance tax liability.
There are a number of ways of mitigating IHT. A summary of options for UK individuals main assets are described below:
The home is quite difficult, but by using equity release and creating a debt can help.
They grow tax free and are also outside the estate.
ISAs grow tax free but they are included within the estate. On death the value can be passed to a surviving spouse in the form of an Additional Permitted Subscription (APS).
Stocks & Shares, Investment Bonds
These are included in the estate. However, on death any gains are wiped clean so that they are not double taxed.
Cash, National Savings, Premium bonds
These are included in the estate.
Ways of mitigating IHT
By planning early there are a number of options to help reduce potential IHT:
- ▲ Normal expenditure out of income rules
If you have excess income this can be given away
- ▲ Charity
Gifts to a charity are exempt
- ▲ Gifting
By giving away and surviving 7 years the value of the gift should be outside the estate.
- ▲ Trusts
Placing the asset into a trust e.g. a discounted gift has the potential to reduce the estate after 7 years
- ▲ Business Relief
By investing into qualifying unquoted companies, within 2 years of death
- ▲ AIM shares
Investing into small qualifying quoted shares also uses Business Relief to mitigate IHT
- ▲ Enterprise Investment Schemes
EIS also uses Business Relief but also has the benefit of reducing CGT and also Income tax.
- ▲ Wills
By using a spousal bypass trust
Estate planning is very complex and specialist advice should be taken as there are a number of traps for the unwary.
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