7 March 2013
The current tax year ends on 5 April 2013. In advance of this, individuals and businesses may wish to consider potential tax planning opportunities for both the 2012/13 tax year and ahead of the 2013/14 tax year commencing.
With ever changing tax rates, reliefs and allowances and the increasing complexity of the tax system, it is vital to organise ones affairs in a tax efficient manner to create, increase and protect wealth.
We have highlighted below a number of tax planning opportunities for consideration before 5 April 2013. Key areas are:
• Income Tax Planning
• Capital Gains Tax Planning
• Estate Planning
• Corporate and Business Tax Planning
• Property Tax Planning
• Tax Efficient Savings
• Tax Efficient Investments
Income Tax Planning
Rates of Income Tax and National Insurance Contributions have remained high for a number of years. However, the Government has announced its intention to reduce the additional rate of Income Tax for the forthcoming tax year. Forward planning is therefore essential for anyone who may be affected by this to ensure that they maximise the benefit of the falling top rate of tax.
For the 2012/13 tax year, the personal allowance (level of income on which no tax is paid) is £8,105. For those over the age of 65 and 75, the personal allowance increases to up to £10,500 and £10,660 respectively (depending on the level of income).
The following will continue to apply for the 2013/14 tax year;
• In accordance with the previous tax year, the personal allowance continues to be withdrawn at the rate of £1 for every £2 of income in excess of £100,000.
• Individuals can maximise the availability of various Income Tax reliefs, such as pension contributions and charitable donations.
• Couples should ensure that income generating assets (investments and pensions) are split efficiently between spouses.
• Considering investments subject to Capital Gains Tax where rates are lower than those for Income Tax.
• Ensuring borrowing is structured in the most tax efficient manner so as to maximise interest relief deductions.
For the 2013/14 tax year, the following changes are to be implemented;
• The personal allowance will be increased to £9,440.
• The level of income required before which higher rate tax is paid will decrease, whilst the additional rate tax band remains at £150,000.
• The additional rate of tax applicable where total income exceeds £150,000 will be reduced to 45% (from 50% currently). The effective tax rate for dividend income will fall from 36.1% to 30.1%.
• From 6 April 2013, there will be a cap on certain Income Tax reliefs, which are currently unlimited.
The tax changes give rise to a number of planning opportunities for individuals, especially those paying Income Tax at the additional rate. Some of these being;
• Making pension contributions or charitable donations before 6 April 2013 tax year to ensure that these are tax relieved at the current higher tax rate.
• Deferring income, where possible, to the new tax year and owner managers considering profit extraction planning.
• Where possible, seeking to ensure that any tax reliefs that will be caught by rule changes are crystallised and claimed prior to 6 April 2013.
Statutory Residence Test
From 6 April 2013, a statutory residence test will be introduced in order to determine whether an individual is UK resident for tax purposes. This test should be considered by any individual currently claiming to be non UK resident for tax purposes, or who spends a significant amount of time outside the UK, as the new test could result in a change of UK residence status.
High Income Child Benefit Charge
The high income child benefit charge came into effect on 7 January 2013. Broadly, this will affect couples where one partner has adjusted net income in excess of £50,000. The person in the couple with income in excess of this limit will be subject to a tax charge, calculated by reference to the child benefit received. Couples who think they may be affected by the HICBC should consider whether they should continue claiming Child Benefit or, if possible, look at their planning options to ensure that they are not subject to the new tax charge.
Capital Gains Tax Planning
Individuals, trustees, or businesses, who have assets potentially subject to Capital Gains Tax should review their Capital Gains Tax exposure and implement any planning ahead of disposals.
Some key points for consideration before 6 April 2013 are:
• Utilise the annual exemption of £10,600 for 2012/13.
• Make best use of any existing Capital Gains Tax losses.
• Transfer assets to your spouse to make use of existing Capital Gain Tax losses available and their annual exemption.
• Review whether any investments have become of negligible value as it may be possible to claim tax relief.
• If you own more than one residence, undertake planning to maximise future main residence relief claims.
Entrepreneurs’ Relief (“ER”) is an extremely valuable Capital Gains Tax relief, giving a 10% Capital Gains Tax rate (on £10m of lifetime gains) on disposals of qualifying assets.
Recent changes to ER ensure that employees which have been granted shares in their employing company, under an Enterprise Management Incentive (“EMI”) scheme, can potentially qualify for ER in relation to disposals of their EMI shares made after 6 April 2013, and thus benefit from the lower rate of Capital Gains Tax of 10%.
The rules around ER are complex and it is necessary to plan more than one year ahead of a disposal to ensure that the benefits of the relief are maximised. Individuals with businesses, or assets, which may qualify for ER should undertake a review and implement any planning early, ahead of future disposals.
Many individuals are unaware of their exposure to Inheritance Tax and many do not have Wills in place to protect wealth for the next generation. Planning early is key to ensuring that Inheritance Tax is minimised and wealth is protected.
Some key points individuals may wish to consider before 6 April 2013 are as follows.
• The annual Inheritance Tax gift exemption of £3,000.
• If the £3,000 annual exemption was not used in 2011/12, the available exemption for 2012/13 could be £6,000.
• Separate gifts of up to £250 can be made to any number of individuals in a tax year.
The more general key points individuals should consider are:
• Making gifts to start the “7 year clock” – after which time gifts may be free from Inheritance Tax.
• Link gift planning with Capital Gains Tax and Inheritance Tax planning.
• Make full use of the Inheritance Tax exemption for regular gifts out of surplus income.
• Ensure all life assurance and pension policies are written into trust as appropriate.
• Those with business assets should review their qualification for Business Property Relief and if applicable Agricultural Property Relief.
• Ensure Wills are made and are up to date to properly plan for Inheritance Tax and to protect wealth as it passes down the generations.
• Individuals and families with family trusts should review their trust arrangements as there have been various changes in recent years. A review of current trust structure could highlight opportunities for improving the position.
Corporate and Business Tax Planning
Corporate and unincorporated businesses should consider methods of reducing taxation.
For the 2012/13 financial year, key points to note are as follows;
• Utilise capital allowances, including the Annual Investment Allowance (“AIA”), on qualifying expenditure. From 1 January 2013 the AIA limit was increased from £25,000 to £250,000. Care should be taken where the accounting period straddles these limits to ensure the total expenditure does not exceed the pro-rated amount.
• The Corporation Tax rate for small companies remains at 20%.
• For companies paying Corporation Tax at the main rate, this was reduced to 24% and will be further reduced to 23% and 22% in respect of the 2013/14 and 2014/15 financial years.
• Undertake a business review to identify any areas for tax saving including reviews on the availability of Capital Gains Tax and Inheritance Tax reliefs.
• Review profit extraction strategy to minimise taxation.
• Review business structure and inclusion of family members and/or key employees within this strategy.
• Consider tax efficient benefits planning.
Owner-Employee Share Schemes
From April 2013 a new owner-employee share scheme will be introduced, the purposes of which is to allow companies to offer Capital Gains Tax exempt shares worth £2,000 – £50,000 to employees who forgo certain employment rights. Companies of any size will be able to use the scheme and will be able to choose whether to only offer this new type of contract to new employees. Whether an existing employee wants to convert to an owner-employee will be optional. Like all new schemes, careful consideration should be taken and professional advice sought, as the regime will be complex and not appropriate for all.
Property Tax Planning
With forward planning, owners of residential and/or commercial property could make substantial tax savings.
Property owners should;
• Plan timing of expenditure to maximise tax savings.
• Review property ownership structures.
• Plan ahead for future disposals to mitigate Capital Gains Tax.
• Maximise capital allowance claims as there are often substantial allowances that can be claimed in respect of both the acquisition costs and post acquisition expenditure on properties.
High Value Residential Property
The changes to be brought in with regards to high value residential property will give rise to the following tax charges;
• From 21 March 2012, residential properties with a value in excess of £2m, which are acquired by ‘non-natural persons’, will be subject to Stamp Duty Land Tax (“SDLT”) at the new rate of 15%.
• From 1 April 2013, ‘non natural persons’ with an interest in residential property, with a value in excess of £2m, will be subject to an annual tax charge. Depending on the value of the property this charge will range from £15,000 – £140,000.
• From 6 April 2013, UK residential properties which are disposed of for a value in excess of £2m, by ‘non natural persons’, will be subject to UK Capital Gains Tax at the rate of 28%.
The rules surrounding high value residential properties are complex and there are various exemptions and reliefs available. Therefore, those concerned that these rules may affect them, should seek advice as a matter of urgency.
The Government has continued to change the rules surrounding personal pensions, the majority of which do not take effect until the 2014/15 tax year.
Key points for the 2012/13 tax year are;
• Contributions to a personal pension, on which tax relief is available, remain unchanged at the higher of 100% of the individuals relevant UK earnings or £3,600.
• The annual allowance remains unchanged at £50,000 (which can be increased by any unused carried forward allowance from previous years).
• The lifetime allowance is £1,500,000. Lifetime allowance charges also remain unchanged at 25% or 55% (depending on how benefits are taken)
Tax Efficient Savings
There are a number of tax efficient savings products and strategies that could form part of an overall wealth management strategy.
ISAs remain as popular as ever. The options include cash ISAs, stocks and shares ISAs and more complex investment products in an ISA wrapper. Growth within an ISA is free from Income Tax (dividend tax credits non recoverable) and Capital Gains Tax and there are generally no restrictions in accessing funds within ISAs. The annual maximum for 2012/13 is £11,280 (£5,640 cash). For 2013/14 this is increased in line with inflation to £11,520 (£5,760 cash). These limits are per person and so a married couple have access to two annual ISA allowances.
Junior ISAs have been available since November 2011, for children who were not beneficiaries of the old Child Trust Fund. They have the same tax benefits as standard ISAs but withdrawals can’t be made until the child’s 18th birthday, at which point the options are to encash the ISAs or convert them into a standard ISA. They can be a useful vehicle for parents and grandparents to provide for the child’s future. Again, various forms of Junior ISA exist including cash and stocks and shares ISAs. The annual limit for Junior ISA contributions at present is £3,600 but will increase to £3,720 for the 2013/14 tax year.
Consideration may be given to the wide range of tax advantaged savings products provided by National Savings.
The ability to make pension contributions for children and obtain basic rate tax relief for their benefit can be an attractive option to help build up a pension pot for the next generation. Access to the pension fund will of course be longer term and subject to the retirement age (currently 55).
Contributions can be made of up to £3,600 gross on behalf of non taxpaying children. The basic rate tax relief given at source of 20% means the actual net cash contribution required to achieve a £3,600 gross contribution is £2,880.
Offshore Investment Bonds
Offshore Investment Bonds can be a very useful, tax efficient, savings tool. Investments within the Bonds grow free of tax (except for withholding taxes). Investment options within the Bonds are wide and varied, from cash to equity collectives. Bonds can generally invest in the same assets as individuals or other structures, except for direct individual shares or properties. The Bonds provide a long term deferral of tax, which can be avoided by future planning.
Due to the high rates of Income Tax, one may consider other savings products as part of a portfolio. Some of the opportunities such investments may provide include:
• Capital Gains Tax exposure as opposed to Income Tax
• Ability to maximise use of annual Capital Gains Tax exemption
• Income Tax deferral
• Opportunities for “bed and breakfasting” or “bed and ISA” on Capital Gains Tax assets
• Inter-spouse planning
As with any investment, the tax advantages should only be one factor in deciding whether that investment is appropriate. Individuals can seek advice from Magma Wealth Management with regards to the suitability of tax efficient investments as part of their overall financial planning and wealth management strategy. Advice should also be sought on the suitability of underlying investments within tax efficient wrappers.
Tax Efficient Investments
Whether you are looking to reduce your tax liabilities, invest money for the medium to long term, or for the benefit of the next generation, there are a number of tax efficient investments and savings opportunities that could form part of an overall wealth management strategy.
Enterprise Investment Scheme (“EIS”)
The EIS offers tax relief on an investment in new shares of an unquoted trading company that satisfies certain conditions. The key tax benefits that may be available to EIS investors for 2012/13, based on a minimum 3 year investment, are as follows;
• 30% Income Tax relief for 2012/13 and/or 2011/12 (£1,000,000 maximum investment in each year)
• Capital Gains Tax deferral relief
• Capital Gains Tax exemption on EIS shares
• 100% Inheritance Tax relief (after 2 years)
• Loss reliefs in the event that the investment falls in value or fails
Seed Enterprise Investment Scheme (“SEIS”)
The SEIS was introduced on 6 April 2012, the purposes of which is to offer tax relief on an investment in new ‘start-up’ unquoted trading companies that satisfy certain conditions.
The key requirements to be satisfied in order to qualify for SEIS are as follows;
• The company must be a UK trading company (certain sectors excluded) and have been trading for less than 2 years.
• It must have gross assets of less than £200,000 and not more than 25 employees.
• A company can raise up to £150,000 under the scheme.
The key tax benefits that may be available to SEIS investors in 2012/13, based on a minimum 3 year investment, are as follows;
• 50% Income Tax relief (£100,000 maximum investment).
• Capital Gains Tax relief on any other gains in 2012/13 reinvested into an SEIS qualifying company in 2012/13 or 2013/14.
• Capital Gains Tax exemption on SEIS shares
• 100% Inheritance Tax relief (after 2 years)
• Loss reliefs in the event that the investment falls in value or fails
As regards to both SEIS and EIS, Magma is able to assist companies looking to use the schemes and individuals who wish to invest in qualifying companies.
Venture Capital Trusts (“VCTs”)
VCTs provide capital to small and expanding companies. The key tax benefits available to VCT investors, based on a minimum 5 year investment, are as follows;
• 30% Income Tax relief in 2012/13 (£200,000 maximum investment)
• Capital Gains Tax exemption on VCT shares
• Tax free dividends
The rationale for considering EIS, SEIS and/or VCTs currently includes continued government support, difficulty small business have in raising capital from traditional sources and the availability, in the case of EIS and VCTs of so called “planned exit” opportunities, which provide investors with opportunities that are considered lower risk than a traditional venture capital investment. The Government has sought to limit the use of some structured or ‘synthetic’ EIS/VCT products which aim to reduce investment risk, but many interesting business models with HMRC advance assurance remain.
There are many Income Tax, Capital Gains Tax and Inheritance Tax planning options, using EIS, SEIS and/or VCT tax reliefs. They are all complex investments, should be considered high risk and are only suitable for certain individuals. It is essential to seek tax advice alongside investment advice. Individuals can seek advice from Magma Wealth Management on the merits and risks of such investments and whether they are suitable as part of an overall wealth and financial planning strategy.
For more information and advice on end of year tax planning opportunities, please contact us on 01788 539000.
Magma is a leading firm of Chartered Accountants and Chartered Tax Advisers, providing a wide range of professional advisory services to owner managed businesses and private individuals. Magma thrives on its work with entrepreneurial businesses and their people. Magma works closely with its clients, delivering proactive and innovative advice. Our focus is on building long term relationships with our clients to help them and their businesses succeed, reduce taxation and create, increase and protect wealth. Magma offers a breadth of technical expertise and specialist advisers across six integrated service areas: Audit and Assurance, Business Services, Corporate Finance, Corporate and Business Tax, Private Client Tax and Wealth Management.
This document has been prepared as a general summary. It has been written for information purposes, should not be relied upon and is not a substitute for professional advice which should be sought. This document does not constitute taxation, financial planning or investment advice. Neither Magma Chartered Accountants or any of its employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document. Magma Chartered Accountants is the trading name of Magma Audit LLP, a limited liability partnership (Registered in England No. OC370086). Magma Audit LLP is a subsidiary of Magma Partners LLP (Registered in England No. OC370051). Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Magma Partners LLP is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. A list of members is available on request.