Year end tax planning

The 2016/17 Tax year will end on 5 April 2017, providing you with a few weeks to focus your mind clearly on ways to cut your tax bill.

The aim of year end tax planning is to maximise your allowances and exemptions with this principle being applied across each tax discipline. Many of the allowances you are entitled to are annual allowances and will be lost if they are not used.

All individuals are entitled to a personal allowance which for the current Tax year exempts income up to £11,000. You should consider ways to split income with your spouse to make the most of both your personal allowances and also the lower rates of tax. This can be more beneficial than in previous years because along with the personal allowance there is also a personal savings allowance of £5,000 and the 0% dividend rate on the first £5,000 of dividends. If one spouse’s earned income falls within their personal allowance it may be worth having all investment income in their name to make use of the Personal Savings allowance and dividend 0% band.

It is worth considering the changes that have already been announced that will start in the new tax year. Those with property portfolios may start to feel a significant change to their profitability as the tax relief on finance costs is restricted from 6 April. Those in this situation should be using this time to crunch the numbers and assess the impact and see what can be done now to minimise the damage.

We are all entitled to a Capital Gains Tax annual exemption which is set at £11,100 for the current tax year. With the Capital Gains Tax rate being reduced to a maximum of 20% in most cases, this exemption isn’t worth quite as much as it was previously, however, if you undertake some planning its benefit can be doubled or even quadrupled. The maximum rate for residential property, which is not covered by principle residence relief, remains at 28% so planning with the annual exemption can still make significant savings.

As with most other allowances, the Capital Gains Tax exemption cannot be carried forward or transferred between spouses. However assets can be transferred between spouses tax free, therefore a pre-sale transfer into joint names with your spouse would obtain the benefit of two annual exemptions. At this time of year in particular a Trust arrangement can be an attractive opportunity to straddle a sale over two Tax years and obtain the benefit of both years’ annual exemptions.

The Inheritance Tax rules provide an annual exemption for gifts which should also not be overlooked. A strategy of lifetime giving is an effective way to reduce your Estate’s exposure to Inheritance Tax. Giving £3,000 each year to the next generation will mean it escapes Inheritance Tax on your death, regardless of how long you survive. The annual gift exemption can be carried forward but only for one year, therefore if you made no gifts in the previous Tax Year you can gift £6,000 in the current year and that gift will be immediately exempt, however if you wait until after 5 April then the earlier year’s allowance will be lost.

Looking ahead to the new Tax Year, April will see the introduction of the Residence Nil Rate Band, initially set at £100,000 per person. The new exemption can be set against the value of your home which passes to a lineal descendant on death. Now would be a good time to review your will to ensure that your estate would actually benefit from the new exemption. Eligibility for the relief is not straight forward and many people will need to amend their will to ensure they qualify. For example, what was considered to be good will planning in the past is likely not to be the case now.

To conclude; you need to take action now to maximise the benefits you are entitled to which all have a deadline of 5 April 2017, and you need to ensure you qualify for future reliefs that are to be introduced. Effective planning requires time and consideration but with the help of professional advice you could significantly reduce your personal tax burdens.

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