Reduce your tax bill and increase your wealth by 5 April!

The end of the 2020/21 tax year will soon be upon us (5 April), but there is still time to review your financial and taxation affairs to try and reduce your tax bill. In this article, we give you some pointers on where you could reduce your personal tax bill, covering income tax, capital gains tax and inheritance tax. However, you will need to act now to implement any tax saving strategies before 5 April.

Income Tax

There are currently four tax rate bands which are applicable to your level of income, these are:

Suggestions for how to reduce your income tax liability and make the most of the different tax rates and allowances:

• To benefit as a couple, you can transfer £1,250 (10%) of your personal tax allowance to your spouse or civil partner. To do this, your income should be below the personal allowance (£12,500) and your partner must be a basis rate taxpayer.
• As a basic rate taxpayer, you can pay up to £40,000 per annum, tax free, into a pension (this is reduced to £4,000 for higher rate taxpayers). Contact your IFA or pension adviser on how to pay in a lump sum to your pension between now and the end of the tax year.
• Where possible you could consider sharing the ownership of income producing assets, such as a business or buy to let property, with your spouse or possibly your children (providing they are 18 years or over).
• If you are a higher rate taxpayer with an income between £100k and £125k you risk losing your £12,500 personal allowance. To avoid this, you should consider increasing your pension contributions or make qualifying charitable donations to reduce your annual income.
• The above pension and charity donations tax planning strategy can also be adopted if you claim child benefit and earn between £50,000 - £60,000, otherwise you risk being liable to pay the Child Benefit Tax Charge.
• For director shareholders of limited companies, providing your company has distributable profits, you can pay yourself a tax-free dividend of £2,000. And as dividends are taxed at a lower rate than income, you could also pay a larger dividend and only pay tax at 7.5% if you are a basic rate taxpayer; 32.5% if you are a higher rate taxpayer; or 38.1% if you are an additional rate taxpayer.
• If you happen to have any 'spare cash', you can invest up to £20,000 a year into an Individual Savings Account (ISA), and you will not incur income or capital gains tax on any future returns you get on your investment.

Capital Gains Tax

You are liable to pay Capital Gains Tax (CGT) on the profit/increased value of an asset which you sell, give away, swap, or get compensation for. These assets could include:

• property which is not your main residence*;
• property which IS your main residence, but you have let out part of it; have used it for business purposes; or it is more than 5,000 square meters;
• personal possessions which are valued at £6,000 or more;
• shares that are not in an ISA or PEP; or
• business assets.

*The rules surrounding the reporting and payment of CGT on residential property which is not your main residence have changed recently. This article explains the changes in more detail.

All taxpayers receive an annual CGT allowance of £12,300. However, any gains which are made over and above this amount are taxed as follows, depending on whether you are a basic rate or higher rate taxpayer:

• Basic rate taxpayer – CGT paid at 10% or 18% (if the gain relates to a residential property that is not your main residence).
• Higher rate taxpayer – CGT paid at 20% or 28% (if the gain relates to a residential property that is not your main residence).

Suggestions for how to reduce your CGT bill include:

• Gifting an asset to your spouse or civil partner before selling the asset, providing they have their CGT allowance available.
• Identifying ways to reduce your annual income could also help to reduce your CGT bill as well.
• If you disposed of an asset(s) within the past 4 years which made a loss, and you have not done so already, you can use those losses to reduce this year's CGT liability.
• Structuring your business so that you qualify for entrepreneurs' relief when you sell it. This would allow you to only pay 10% CGT on the disposal of the business, providing the gain is £1m or less.
• If your business is eligible, you may be able to claim gift hold-over or busines asset rollover reliefs.

Inheritance Tax

Whilst it may not be something you currently need to deal with, it pays to have a long-term plan for reducing future inheritance tax liabilities and to start the process straight away. Inheritance tax (IHT) is not due if the deceased's estate is valued at below the IHT threshold of £325,000. Where the estate is worth more than the IHT threshold, you can avoid paying IHT by leaving everything to your spouse, civil partner, a charity or a community amateur sports club.

However, estates that are valued above £325,000 and where no prior plans for the distribution of assets have been made, will be required to pay 40% IHT on everything above the IHT threshold. Where sufficient charitable legacies have been made, this rate could be reduced to 36%.

Suggestions for how to reduce a future IHT bill include:

• Making a will and regularly reviewing your assets and who you will be bequeathing these to.
• Give away gifts up to the value of £3,000. A gift can be money, property or possessions. Such gifts are not included in the value of your estate, provided you live for seven years or more after the gift was made.
• Consider giving away one or more of the following gifts:
  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child);
  • normal gifts out of your income, for example Christmas or birthday presents - you must be able to maintain your standard of living after making the gift;
  • payments to help with another person's living costs, such as an elderly relative or a child under 18;
  • gifts to charities and political parties.

Summary

There are many ways in which you can look to reduce your personal tax bills before the end of the tax year. However, it is important to seek professional advice as you could aim to reduce your tax in one area and unwittingly give yourself a problem elsewhere.

Over the next few weeks, we can review your circumstances and help identify ways in which you can reduce your personal tax liabilities. But you will need to act quickly, as for any tax savings to be made, the appropriate action will need to have been implemented by 5 April 2021.

If you would like to discuss your personal circumstances, please contact us on Bingley 01274 518200 or Ilkley on 01943 817045. Alternatively, you can email us on office@wilkinson-partners.co.uk.