Act by 5 April to save tax: Part 2
In this, the second of two articles, Donald Drysdale reminds practitioners that tax planning season is here and 5 April is looming.
Tax planning season
You’ve heard it before. Tax planning should be an all-year-round activity. However, the next couple of months may be crucial in helping to keep your clients’ tax liabilities down by ensuring that appropriate steps are taken before the current fiscal year ends on 5 April.
In my last article, I set out some planning points relating to income tax and national insurance contributions (NICs), and then looked at pensions and various other tax-advantaged investments. In this article, I’ll examine some capital tax aspects, before commenting on the ethics of tax planning.
Capital gains tax
The capital gains tax (CGT) annual exempt amount of £11,700 for 2018/19 can’t be carried forward. If not used in this tax year, it disappears. Remember that it applies separately to each spouse or civil partner.
Given current stock market volatility and Brexit-related uncertainties, there may be scope for realising investment losses to set against any capital gains that have already been realised. Pay particular attention to the identification rules on ‘bed and breakfasting’.
Don’t overlook the opportunity to establish capital losses on negligible value claims, and the possibility of backdating such claims by up to two years.
If paying CGT on a significant gain can’t be avoided, there may still be some flexibility on timing. Delaying a capital disposal from shortly before 6 April 2019 until on or after that date would defer the CGT payment date by a year.
Where your client hopes to claim entrepreneurs’ relief on an eventual disposal, care is needed to ensure that all qualifying conditions are met throughout the relevant qualifying period. Note the latest changes to the rules for entrepreneurs’ relief which takes effect from 29 October 2018 and 6 April 2019 respectively.
CGT private residence exemption is the most important tax relief for many clients, and the deadlines for it are determined not by the end of the fiscal year but by other factors. Nonetheless, ensuring that this relief is maximised should be an essential part of the tax planning process.
While on this topic, note that moving house is also fraught with difficulty because of the differing rules for stamp duty land tax in England and Northern Ireland, land and buildings transaction tax in Scotland, and land transaction tax in Wales. Care is needed to minimise tax, especially where more than one property is owned at any time.
Clients’ wills should be reviewed periodically to ensure that previous inheritance tax (IHT) planning remains valid. This is particularly important following material changes in circumstances or family relationships.
Changes in IHT law must also be taken into account. For example, in recent years the previously simple nil-rate band became transferable between spouses or civil partners and was then supplemented by the introduction of a residence nil-rate band.
Gifts and bequests between spouses or civil partners are exempt from IHT, subject to a limit where the recipient is non-UK domiciled.
Gifts totalling £3,000 in a tax year are exempt from IHT. If all or part of this exemption remains unused, the balance can be carried forward for only one year but may be used only after the exemption for that later year.
Small gifts to individuals, where they amount to less than £250 to the same person in a tax year, are exempt from IHT and don’t count towards the £3,000 annual exemption.
Exemption from IHT is also available for gifts in consideration of a marriage or civil partnership. This applies to gifts by parents of either party up to £5,000 each, by certain other relatives up to £2,500 each, and by any other person of up to £1,000.
Normal expenditure gifts out of income may be exempt from IHT where the donor is left with sufficient net-of-tax income to maintain their usual standard of living. Claiming this can be straightforward where regular gifts are made by (for example) paying life assurance premiums, but demonstrating the regularity of cash gifts may be problematic – especially if the donor has since died.
Most non-exempt lifetime gifts are potentially exempt transfers (PETs) attracting no IHT charge when made and become wholly exempt on the donor surviving seven years after the PET. The IHT rate is tapered for PETs made between three and seven years before death.
Exemptions from IHT are available for gifts to certain national heritage bodies, national institutions, universities, government departments, health service bodies, local authorities, and libraries.
Gifts to charities, property held on trust for charitable purposes, and gifts to major political parties are also exempt – but this may not cover all the political parties you’d expect. Gifts of land to UK housing associations and registered social landlords are also exempt from IHT.
Where 10% or more of a deceased person's net estate is bequeathed to charities or community amateur sports clubs, the IHT rate on the remaining estate may be reduced from 40% to 36%.
The ethics of tax planning
The tax reliefs mentioned above and in my previous article are only a few of the many optional tax reliefs created by Parliament. Taxpayers should feel free to avail themselves of these in circumstances where they are intended to apply and should do so with a clear conscience.
Tax advisers have a vital role to play in helping citizens pay the right amount of tax. Indeed, taxpayers who don’t seek professional advice may run serious risks – either of paying too much tax, or of being exposed to interest and penalties for paying too little.
Practitioners must heed the guidance contained in Professional Conduct in relation to Taxation (PCRT) – especially the expected standards of behaviour when advising on tax planning arrangements, in order to avoid any action that discredits the profession.
These standards demand that “members must not create, encourage or promote tax planning arrangements or structures that (i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or (ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”
While unduly aggressive tax planning may be unacceptable, failure to provide tax planning advice may be equally serious. Professionals retained to give tax advice should ensure that they are not open to criticism for failing to identify acceptable tax planning steps which their clients ought to consider taking.
Article supplied by Taxing Words Ltd