Tax: Time to plan for 5 April 2018
As the end of the current fiscal year approaches, Donald Drysdale encourages practitioners to ensure that their clients pay the right amount of tax.
It is time once again for prudent taxpayers and their agents to look closely at steps they might take by 5 April to reduce exposure to tax.
Note that 5 April 2018 is the default time limit for elections and claims for the fiscal year 2013/14 where specific legislation does not specify a different time limit.
Why 5 April?
In the Middle Ages, the legal year began on Lady Day, 25 March. On the Julian calendar, this was the first of the religious quarter days by which rents and debts traditionally became payable.
Most of Europe changed to the more accurate Gregorian calendar in 1582, and Scotland did likewise in 1700. When England finally followed suit in 1752, the Julian calendar was 11 days behind the Gregorian calendar. To avoid having a short year, the start of the next legal year was moved to 6 April. This was adopted for income tax on its re-introduction in 1842, and has remained unchanged since then.
What tax planning is acceptable?
Some people might think it inappropriate – perhaps even immoral – to engage in tax planning. I prefer to believe that taxpayers are entitled to ensure that they pay the right amount of tax.
Parliament has created many optional tax reliefs. Taxpayers should feel free to use these where they are intended to apply, and should do so with a clear conscience.
Tax planning within acceptable boundaries is nothing more than prudent financial management. Tax practitioners failing to advise on planning opportunities may be failing in their duties.
Under the guidelines on Professional Conduct in relation to Taxation (PCRT), ICAS members must not create, encourage or promote tax planning arrangements or structures that set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation. This applies equally to arrangements that are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.
The PCRT guidelines define the standards which all professionally qualified tax advisers should follow. These are also the standards by which HMRC can be expected to judge the propriety of tax planning advocated by any tax adviser or undertaken by any taxpayers.
Other published sources provide an abundance of planning ideas, and I shall mention only a few here.
Particular income tax savings may arise from bringing an individual’s income below key levels at which high marginal rates apply – notably £150,000 (the top of the higher rate band), £100,000 (above which the personal allowance tapers away) or £50,000 (above which child benefit is clawed back).
Where spouses or civil partners in a family business pay income tax at different marginal rates, tax savings and optimal NIC treatment may be achieved by pitching remuneration at appropriate levels – so long as these can be justified and are demonstrably paid. Relative income levels may also be adjusted by outright and unconditional transfers of income-generating assets by gift or sale between spouses or civil partners. Generally such steps should be taken early in a tax year to achieve the best outcome.
ISAs should be used throughout a family to shelter as much income and gains as possible. For 2017/18 the £20,000 ISA allowance for each adult may be split as desired between a Stocks and Shares ISA, a Cash ISA, a Lifetime ISA (maximum £4,000) and an Innovative Finance ISA. For each child under 18, the Junior ISA allowance (or, for those affected, the Child Trust Fund limit) is £4,128.
Outside ISAs, investments returns that are tax-free or taxed as capital (generally at 10% or 20%) may be preferable to income. However, taxpayers should seek appropriate investment advice.
For those able to bear high investment risks, income may be sheltered from tax through EIS or SEIS shares, venture capital trust units or social (SITR) investments. In each case investor and investee must meet complex qualifying conditions. Relief may often be set back and claimed in the fiscal year before that in which the investment is made.
For capital gains tax, each individual is entitled to their annual exempt amount (£11,300 for 2017/18). Best use of this may be achieved by careful timing of disposals which crystallise gains and losses, making negligible value loss claims where appropriate, and in some cases transferring assets between spouses or civil partners before disposal. Care should also be taken to maximise other CGT breaks such as principal private residence relief and entrepreneurs’ relief.
The opportunities for salary sacrifice, to save tax and NICs by exchanging remuneration for benefits, are now restricted. This can still work (if set up correctly) for pensions, employer-provided pensions advice, childcare vouchers, workplace nurseries, employer-contracted childcare, ‘cycle to work’ or ultra-low emission cars (CO2 not exceeding 75 g/km). Where agreements made before 6 April 2017 remain unchanged and relate to other cars, accommodation or school fees, the new restrictions won’t apply until 6 April 2021.
The dividend allowance, applying a nil rate of income tax to an individual’s first £5,000 of dividends each year, is to be cut sharply to £2,000 a year from 6 April 2018. Proprietors of owner-managed companies might be able to save tax by bringing forward planned dividends from 2018/19 to 2017/18.
Where savings income (i.e. interest) can be put into the hands of an individual with little or no taxable non-savings income, a significant reduction in income tax may arise from the £5,000 starting rate band and the personal savings allowance of up to £1,000, both taxed at 0%.
For some spouses or civil partners, the transferable tax allowance (also known as the marriage allowance) may save up to £230. One of the least understood tax reliefs, this is claimed by only a small fraction of those entitled to it.
Pension planning is a major topic beyond the scope of this article, but should always be considered as part of each annual tax planning review. It requires a detailed understanding of the rules for tax relief on contributions, and annual allowance and lifetime allowance charges. Don’t forget that any individual, even without earnings, may claim relief at source on net annual contributions of £2,880 – grossed up by HMRC to £3,600.
For Scottish taxpayers (as defined by statute) with earnings, property income and pensions above £26,000, income tax rates from 6 April 2018 onwards are to be higher than those elsewhere in the UK. Proprietors of owner-managed companies might want to weigh up whether to extract profits as remuneration liable to the Scottish income tax rates, or dividends subject to the rates applicable in the rest of the UK.
Taxpayers who believe that Scottish income tax rates may rise disproportionately in future years might eventually consider more radical tax planning. For example, incorporation of a business would become progressively more attractive as the gulf widened between income tax rates on personal remuneration and corporation tax rates on company profits, while a company structure would also allow payment of dividends.
Economic effects of tax planning
Effective tax planning may reduce public revenues – but only to their expected levels. It is within the power of parliaments to limit any unexpected or undesired deviation by creating tax legislation that works as intended.
Fiscal devolution within the UK adds a new dimension. For example, planning by Scottish taxpayers to keep income beyond the scope of higher tax rates in Scotland could shift public revenues from Holyrood to Westminster. Governments should address how to adapt the devolution framework to cope with this.
Article supplied by Taxing Words Ltd