As the tax year end on April 5 2012 approaches, the private client team at KPMG in the UK has put together a checklist of tax issues to consider covering income tax, capital gains tax, inheritance tax, pensions and issues for non-doms.
David Kilshaw, chair of private client advisory at KPMG in the UK, commented:
“With the tax year end just around the corner, people are looking for ways to mitigate their overall tax liabilities. To that end, we’ve prepared a short checklist. When thinking about tax planning you should take into account the proposed reduction in the top rate of income tax from 50% to 45% from April 2013. It seems likely that if you do not need the cash now, you may wish to delay income receipts until after 5 April 2013, if you are able to. Not everything will be suitable for everyone and it’s always crucial to take advice on your own specific circumstances but these ideas may be worth considering before the tax year end.”
1. Income Tax
- Use your personal allowances. Married couples and civil partners can transfer income-producing assets outright to their spouse to make maximum use of their personal allowance and lower rate tax bands.
- Children also have their own personal allowances, even in the year that they were born. However, income of more than £100 that is derived from a parental gift will normally be assessed on the parent if the child is a minor and unmarried.
- Claim a tax refund. Your spouse, civil partner or family dependent may be paying tax on savings income or income from a trust or settlement even if their total income is below the tax threshold. Request and complete a tax rebate claim form from H M Revenue & Customs (“HMRC”) for 2011/12, or register to have savings interest paid without tax deducted.
- Review your PAYE notice of coding. HMRC admitted in previous years that they had issued incorrect PAYE notices of coding for a significant number of taxpayers. In addition, HMRC are seeking to use the PAYE notice of coding to collect income tax in respect of say rental income and savings income. These can be removed from your PAYE notice of coding should you wish.
- Make charitable donations. Provided that you pay sufficient income tax at the basic rate (being 20%) you should be able to obtain income tax relief at your marginal rate for cash donations made under gift aid. A transitional relief that has been available to charities for gift aid donations came to an end on 5 April 2011. You should bear in mind that at present some reliefs from income tax such as Gift Aid are at present unlimited in the amount that can be claimed. However, from 6 April 2013 a cap on such income tax reliefs is proposed. The cap will apply a restriction of such tax reliefs to the higher of £50,000 in reliefs or 25% of income. Tax reliefs to be capped will include but are not restricted to:,gift aid and charitable donations of land and shares; qualifying loan interest relief and loss relief against income.
- Take advantage of tax free investment products. You can invest up to £10,680 in 2011/12, of which up to £5,340 can be saved in a cash ISA with one provider. The remainder can be invested in stocks and shares with either the same or another provider.
- Make tax efficient investments. Discuss with your financial adviser whether you should, as part of your overall investment strategy, make an investment in a qualifying Enterprise Investment Scheme (“EIS”) company or a Venture Capital Trust (“VCT”). These are higher risk investments with generous tax breaks. You can obtain 30% income tax relief on a qualifying EIS investment up to £500,000, ie a tax relief of £150,000, plus after 3 years you can sell the shares completely free of capital gains tax. Relief is available at 30% on a VCT investment up to £200,000. In addition, VCT dividends are tax free and the investment can be cashed in tax free after 5 years.
- Review your investment portfolio. Discuss with your financial adviser whether you should, as part of your overall investment strategy, consider switching to investments that produce growth in a capital form which is therefore subject to capital gains tax rather than income tax, eg dividends or gains on certain offshore funds are subject to income tax.
- Incorporate a partnership. Partners may consider transferring their business to a company with partners becoming directors and/or employees. There are a number of tax, accounting and commercial implications that need to be considered. The main corporation tax rate will be 24% from 1 April 2012 with further reductions planned bringing the rate down to 22% from 1 April 2014.
- Consider capital expenditure. Full tax relief (ie 100%) is currently available on capital expenditure that qualifies for Annual Investment Allowances up to a maximum of £100,000 spent. From April 2012 onwards this limit will be reduced to £25,000. Consideration would need to be given to funding the acquisition.
- Consider a company purchase of own shares. Where the full capital gains tax treatment conditions are not met the proceeds from a sale of shares back to your private limited company are likely to be taxed wholly or partly as income. If a company purchase of own shares is planned due to exit or succession, consider completing the exercise prior to 5 April 2012 to make use of any surplus basic rate tax band you may have.
- Get tax relief on financing. Investors in qualifying private limited companies, partnerships or rental properties qualify, in certain circumstances, for tax relief on the interest paid on loans taken out in their own name to provide investment or financing for those business enterprises. But you need to be aware that an announcement in this year’s Budget, cap the the amount of tax relief on interest payments from April 2013. You may wish to check whether your circumstances qualify for tax relief or consider restructuring your borrowings if you do not already obtain tax relief on such loans.
- Choice of accounting date : sole traders and partnerships. An accounting date early in the tax year under the self assessment system is a cash flow benefit for a growing business as there is a longer period between earning profits and paying tax the tax due on them, but current economic conditions mean that some businesses might benefit from a change in accounting date to ensure that lower profits come into charge earlier, reducing tax payments. Of course as profits rise again, this might not be attractive, and businesses are not permitted to change accounting date more than once every five years unless it is for genuine commercial reasons. The alternative is to consider amending your tax payments on account for the current tax year based on your actual profit for the relevant period.
2. Capital Gains Tax (“CGT”)
- Take professional advice now if you are expecting to make substantial capital gains in the future, or have already done so in the current tax year.
- Plan disposals of chargeable assets to make use of the CGT annual exemption allowance (£10,600 for 2011/12) available to every individual.
- Consider transferring assets with built in gains to your spouse or civil partner, if they have unused capital losses and/or annual exemption.
- Consider making gifts of certain assets whilst asset values may be relatively low.
- Bed and breakfasting (the sale and repurchase overnight) of the same class of shares is no longer tax effective. But the shares could be sold by you and repurchased by your spouse/civil partner, or by another related entity such as your ISA or family trust. This means you don’t have to give up the asset, but you make use of your annual exemption allowance or capital losses.
- Check you have made the appropriate principal private residence election with HMRC if you have more than one property for personal use.
- Anyone who has made sizeable capital gains may wish to consider investing in a qualifying Enterprise Investment Scheme (“EIS”) company. This is a higher risk investment with generous tax breaks. A qualifying EIS investment allows you to defer capital gains arising in the previous three years or the subsequent 12 months. You will be liable to pay the CGT when the shares are subsequently disposed of, and care should be taken as there is no guarantee that CGT rates will remain at current rates.
- Consider realising losses on shares subscribed for in a qualifying company to set against income tax liabilities.
- Seek professional advice to help you to review whether Entrepreneurs’ Relief (“ER”) is available on the first £10m of capital gains made from the sale of shares or assets of a qualifying business entity. ER reduces the effective rate of CGT down to 10% on the first £10m of gain for disposals made on or after 6 April 2011 during an individual’s lifetime. For any disposals made prior to this date the lifetime limit was lower.
- ER can be worth up to £1,800,000 per individual and can also be made available to other family members with careful planning.
- Consider the position of foreign currency held with reference to whether the funds are standing at a gain or loss against UK sterling. Foreign Exchange (FOREX) gains and losses for individuals, trustees of settled property, and personal representatives of deceased persons should no longer be subject to the capital gains tax regime from 6 April 2012. We therefore recommend that FOREX exposure on portfolios and bank accounts is reviewed before 5 April 2012. A tax professional can review your FOREX position and provide advice if appropriate.
3. Inheritance Tax (“IHT”)
- Do you have an up to date Will?
- Ensure you have written any lump sum death benefits into trust so that the funds do not form part of your estate on death for IHT purposes.
- Make use of the annual exemption for gifts up to £3,000 each year, which can be carried forward one year only before it is lost. Make use of other gift reliefs available such as gifts on marriage.
- Establish a regular pattern and basis for gifts in accordance with the “normal expenditure out of income” principles so that they are exempt from IHT.
- Consider alternative structures to trusts, such as family limited partnerships or a family investment company.
- Consider giving away assets that qualify for business property relief or agricultural property relief now. It is not certain that these reliefs will continue to be available in the future.
- Consider insuring against potential IHT liabilities.
- Be careful of the pre-owned assets rules that impose an income tax charge if you have use of a property (eg a home or holiday home) or a chattel (eg a work of art) that does not belong to you but that you previously owned or provided the funds, directly or indirectly, to purchase.
- Review your pension contributions. The Annual Allowance has been reduced from £255,000 to £50,000 gross for contributions to arrangements with pension input periods (PIPs) ending in the year to 5 April 2012. All contributions must be taken into account (including contributions made by your employer). Transitional rules apply to 2011/12 PIPs which had already started when the new rules were announced in October 2010.
- Special rules apply when measuring the increase in value of Defined Benefit (final salary) Schemes.
- You could still potentially make contributions up to £200,000 gross in 2011/12 with up to 50% tax relief. Provided you were a member of a registered pension scheme, you can carry forward notional unused relief for the previous 3 years. This applies to the current year even though the years 2008/09 to 2010/11 were governed by different rules. Those high earners previously restricted by the anti-forestalling rules are likely to have unused relief.
- To access unused relief brought forward, you must first make the maximum payment for the current year. You are then deemed to use the earliest year first. Any unused relief for 2008/09 is lost on 6 April 2012.
- Consider making use of the £3,600 pension contribution allowance you can pay for someone else, such as your spouse or children, even if they do not pay tax. Basic rate tax relief is available on such contributions.
- From 6 April 2012, the Lifetime Allowance (LTA ) reduces from £1.8m to £1.5m. If you expect your pension savings to exceed £1.5m by the time you draw down your pension, you can apply for “fixed protection” to retain a LTA of £1.8m providing no more contributions are made. The application for “fixed protection” must be made by 5 April 2012.
5. Remittance basis for the non-UK domiciled
- Individuals who are not domiciled in the UK for taxation purposes can be subject to separate tax rules in connection with their overseas income and gains. If you are unsure, seek professional assistance in reviewing your domicile status for UK tax purposes.
- Consider now whether you wish to claim the remittance basis for 2011/12 and pay the £30,000 remittance basis charge.
- Review your overseas bank accounts to determine which will be your nominated bank account. Please note that your nominated bank account must have received a minimum of £1 of income during 2011/12. Again, professional advice can help in this regard.
- Ensure you understand the extended definition of a remittance under the rules introduced in 2008.
- Consider postponing UK investments until after 6 April 2012. A new exemption allowing taxable funds to be remitted to the UK for qualifying investment purposes without creating a tax charge may apply after this date. A professional adviser can determine whether this will be relevant to your circumstances.
Please note that this document, which is not an exhaustive list, contains generic information only and nothing in the document should be considered to be investment advice.
The purpose of this checklist is to provide a list of planning suggestions that if undertaken before 6 April 2012 could be of benefit to individuals. However only brief details are given here and people should seek professional advice before implementing any action.
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