With the 31 January deadline looming, you are probably very aware that a late return or tax payment could mean a penalty. If you miss the opportunity to claim exemptions and reliefs by the end of the tax year, it could cost you more than the £100 penalty. There are only a few months left until the end of the tax year, and we encourage you to investigate and make use of the following tax efficiencies before 5 April 2017 comes around.
Additional pension contributions can be particularly beneficial if you have a high marginal income tax rate for 2016/17. It might be that you have income taxed at 40% or 45%, in which the tax saving can be even higher if a contribution allows you to retain some or all of your personal allowance. It is worth noting that income between £100,000 and £122,000 preserves a tax credit claim, or means you do not lose child benefit (income between £50,000 and £60,000). This type of planning is much easier if you have a regular income, or if you already know your self-employed profit for 2016/17. There are some limits on pension contributions for individuals with high incomes.
Low interest rates and the introduction of a personal savings allowance means that cash ISAs are not particularly attractive at the moment. However, for 2017/18, an innovation ISA is available, allowing you to shelter £15,240 of peer-to-peer lending. These investments are deemed to be higher-risk, however. The introduction of the dividend nil rate band has similarly removed much of the attraction of stocks and shares ISAs. For investors who can save capital gains tax (CGT) at the higher 20% rate or have more than £5,000 of dividends, these investments might be worth consideration. There is also the junior ISA which you can put £4,080 into for each child or grandchild.
EIS and SEIS:
Both the EIS and SEIS are high-risk investments, the risks are mitigated if you can benefit fully from the available tax reliefs. You could also invest in a professionally-managed portfolio rather than in individual companies/ With the SEIS, the combined income tax and CGT reliefs can save tax of up to 64%. A shareholding sold at a profit is tax-free and any loss should qualify for further tax relief. The deadline for 2015/16 is effectively 5 April 2017 because an investment made during the 2016/17 tax year can be carried back.
Venture capital trusts (VCTs):
You can obtain 30% income tax relief by investing in VCTs. This is a longer-term investment and like EIS is quite high-risk, although the 20 to 80 different companies that a VCT typically invests in should give a good level of diversification/ There is no carry-back option with VCTs.
CGT exempt amount:
You are encouraged to use your exemption of £11,100 by making disposals. If you have already made gains of more than £11,100 this tax year, dispose of investments standing at a loss that can be set against the gains. You can also establish a loss by making a negligible value claim – no actual disposal is involved. 5 April 2017 is the deadline for backdating a claim to 2014/15.
It might also be beneficial to dispose of further investments if gains will only be taxed at the new basic rate of 10%. Assets can be transferred between spouses and civil partners so that each can benefit from CGT planning. Although bed and breakfasting cannot be used to create a gain or loss by an individual, the same outcome can be achieved if the repurchase is by your partner or within an ISA.
Gifts up to £3,000 a year are exempt. If you have not used the exemption for 2015/16, you can make IHT-free gifts of up to £6,000 before 6 April 2017. Small gifts up to £250 per person in each tax year are also exempt from IHT.
For further information, please contact Rebecca Potton, our Head of Private Clients, email@example.com