6 ways for individuals to save tax by 5 April 2017
As 5 April approaches, Donald Drysdale looks at some new tax planning opportunities and others that are more familiar.
The need for advice
Thankfully, the January tax filing season is finally over! Practitioners may be looking forward to working shorter hours, or perhaps even taking some well-earned holiday. But don’t be too hasty. With less than two months to go until 5 April, your clients may have opportunities before the year-end to minimise their personal tax liabilities. They will need appropriate advice in sufficient time to allow them to act upon it.
In this, the first of two articles, I shall concentrate primarily on steps which taxpayers can take personally. Then in a follow-up article I shall explore some opportunities that are more relevant to those in business.
1. Savings and dividend income
New tax allowances were introduced from 6 April 2016. The personal savings allowance is a nil rate income tax band on savings income such as bank or building society interest. It amounts to £1,000 a year for basic rate taxpayers or £500 for those liable at the higher rate; additional rate taxpayers get none.
Dividends are no longer received with a 1/9th tax credit, so the old ‘net’ has become the new ‘gross’. A tax-free dividend allowance of £5,000 is available to each individual. Dividend income above that amount is treated as the top slice of income and taxed at 7.5%, 32.5% and 38.1% within the basic, higher and additional rate bands respectively.
Earlier in 2016/17, spouses or civil partners may have redeployed savings deposits or shareholdings between them to maximise use of their personal savings and dividend allowances. If they didn’t do this, they might still be able to save tax for 2016/17 by doing so immediately in the case of shares expected to pay dividends by 5 April, or for future years by taking action by early in 2017/18 to redistribute savings and/or dividend income.
2. Individual Savings Accounts (ISAs)
Taxpayers may shelter investments from income tax and capital gains tax by investing their maximum allowance in ISAs by 5 April 2017. For 2016/17 the ISA subscription limit is £15,240, while the limits for Junior ISAs and Child Trust Funds are each £4,080. Note also that to gain greatest advantage, taxpayers may wish to invest their maximum £20,000 ISA allowance for 2017/18 very early in the new tax year.
Since 6 April 2016, where an ISA is designated as ‘flexible’, the taxpayer has been able to withdraw and replace funds during the same tax year without this replacement counting towards their current year’s allowance (although the terms of such an ISA may provide for penalties on withdrawals). Taxpayers who have withdrawn funds in this way in 2016/17 may wish to replace them by 5 April to avoid locking in a reduction to the value of their ISA.
Looking ahead, Lifetime ISAs (LISAs) are about to be introduced. From 6 April 2017, an adult under the age of 40 will be able to open a LISA and pay in up to £4,000 each tax year. They will be able to continue contributing up to the age of 50, and the government will add a 25% bonus to these contributions. Those with a 40th birthday on or soon after 6 April may wish to note the very brief chance to qualify for this 10-year opportunity.
3. Capital gains
Each taxpayer has an annual exempt amount of £11,100 to be set against capital gains realised during 2016/17. If they have already realised gains in excess of this, they might want to consider whether any allowable capital losses could be established by making sales by 5 April – although this may not be easy given the current buoyant state of the stock market.
Alternatively, a capital loss might be established by claiming that a shareholding (or any other asset) has become of negligible value. This could also be relevant if gains were taxable in either of the two immediately preceding tax years, since it may be possible to establish the negligible value loss at an earlier date. For this purpose, making the claim by 5 April could be crucial.
Spouses or civil partners each have their own annual exempt amount. Furthermore, they may gift or sell assets between them without any gain or loss arising; effectively the transferee takes over the transferor’s cost history. Where only one member of a couple has already used their exempt amount and anticipates a further gain by 5 April, a gift or sale to their other half before the external disposal might be expedient to gain the benefit of the recipient’s exempt amount.
4. Inheritance tax (IHT)
I addressed IHT transfers in my recent article ‘Tax: Gifts aren't just for Christmas’. Small gifts, where they amount to less than £250 to the same person in a tax year, are exempt from IHT. In addition, gifts totalling £3,000 in a tax year are exempt; if all or part of this latter exemption remains unused, the balance can be carried forward only one year but used only after the exemption for that later year.
If a taxpayer wants to use their £3,000 annual exemption for 2016/17, they may do so by making a gift or gifts by 5 April. If any part of their annual exemption for 2015/16 remains unused, they may only use this by making transfers by 5 April 2017 that are sufficient to use both the full exemption for 2016/17 and the balance from 2015/16.
5. Marriage allowance
Tax laws rarely protect those on lower incomes. One of the most under-claimed tax reliefs is marriage allowance. HMRC say it is unclaimed by nearly 3m of the 4.2m couples entitled to it. If the Government is able to estimate those numbers so precisely, one wonders why the relief is not given automatically.
Where one spouse or civil partner has no taxable income, they may transfer up to 10% of their personal allowance to their other half if the latter pays tax at the basic rate only. The personal allowance for 2016/17 is £11,000, so this claim can save them tax of up to £220.
The allowance was introduced from 2015/16 and must be claimed within two years after the end of the tax year. Some couples may be able to claim it now for both years and save tax of up to £432.
6. Tax repayment claims
Last but not necessarily least, individuals who have overpaid tax are generally allowed only four years within which they can submit a repayment claim. Thus 5 April 2017 is the last date on which they can claim repayment of tax overpaid in 2012/13.
Many such claims have been made on Form R40 in the past, but unexpected complications may now arise. Since income tax is no longer deducted at source from interest on savings income, HMRC are insisting on bringing more pensioners fully into self-assessment.
Article supplied by Taxing Words Ltd