Chris Williams looks at the perennial problem of year-end planning, and offers a few pointers.
Be prepared for the new dividend rules
From 6 April 2016, any dividends over £5,000 will attract higher income tax rates, even for basic rate taxpayers. This will hit many family companies, but you can at least do something to save yourself tax by paying some of next year’s dividends before 6 April 2016. On every £1,000 that you can bring forward, you will save £75 income tax if it stays within the basic rate band.
The same consideration applies to higher rate and even additional rate taxpayers who will also save £75 per £1000 of dividends.
Make best use of spouses’ income
The dividend changes also affect husband and wife companies, so if you can provide your husband or wife with shares to give them an income that uses their personal allowance, their £5,000 tax-free dividend allowance or a lower dividend rate than your own, you can save your family tax.
If you currently pay higher rate tax on your investment income but your spouse has spare allowances, you can transfer the investments into their name so that the income is covered by their allowances. Changing a bank account that is in your name into joint names before the interest is credited means half of the interest is taxed as your spouse’s.
Have you used the additional pension allowance?
Pension changes made in summer Budget 2015 mean that you may be able to double-up your tax-deductible pension contributions to £80,000. You cannot pay in the full £80,000 now, but no matter what contributions you made before 9 July 2015, the contributions clock was reset that day and you can pay in £40,000 between then and 5 April 2016.
Maximise your ISAs and other investments
Everybody has an annual individual savings account (ISA) investment allowance of £15,240. You do not get tax relief for the investment, but ISA income and gains are tax-free. You can also save up to £4,080 a year for each of your children in a junior ISA.
Other tax-favoured investments: enterprise investment scheme (EIS), seed EIS and the new social investment tax relief offer 30% income tax relief and the chance to defer or completely eliminate CGT on gains made in the preceding three years. These do not depend specifically on the tax year-end, but this is a good time to consider them when reviewing your overall tax situation.
Capital gains tax ‘tweaks’
If you have assets that are standing at a profit, especially easily traded assets like shares, you can crystallise gains up to your annual exemption of £11,100.
Tip:
Buy shares back 31 days later
If the shares you want to crystallise are ones you would like to retain, there are a number of legitimate ploys you can use. If you set the cash to one side and buy shares of the same class more than 30 days later, you will get an uplifted CGT cost and will not be caught out by the ‘anti-bed and breakfast’ rules. In addition, you do not even have to wait thirty days if your spouse buys the replacement shares instead of you. However, you must not cut corners by just giving them the shares; gifts between spouses do not create gains you can set against your annual exemption. You can also use an ISA as a reinvestment vehicle: if you sell shares to crystallise a gain your ISA can buy back the shares the next day.
Practical Tip:
New rules come into force on 6 April 2016 that will remove the 10% wear and tear allowance for furnishings and fittings in buy-to-let property. The rules don’t affect repairs to the property but their replacement rules mean you’ll be able to claim the full cost of replacement furniture, but only of items bought on or after 6 April 2016.
