The Brand Financial Training team offer 6 top tips to check off against your list when planning for the end of the tax year.
It does not seem like five minutes since we ushered in the 2021/22 tax year, which didn’t seem to change much of anything. Yet it’s now 11 months later and here we are preparing to wave goodbye to one which will not be fondly remembered by the UK taxpayer.
With announcements of personal allowances and nil rate bands frozen until 2026 and increases in National Insurance, it’s safe to say most of us will be feeling the pinch one way or another over the next few years. So what can you, the adviser or paraplanner, do over the next four weeks to ensure you add maximum value for your clients?
1. The Personal Allowance/ Basic Rate Band
Does your client have a drawdown or an uncrystallised defined contribution fund available? Have they used their personal allowance?
Whilst taking funds from an IHT efficient pension wrapper has to be weighed up carefully, in some circumstances it may work out to be the best course of action for the client. Where perhaps, for example, your client has retired, has little or no current earned income and is living off savings, but expects State and/ or defined benefit pension entitlements to commence in future years.
Once those entitlements commence, the frozen personal allowance is likely to be used on an annual basis. Therefore, the opportunity to get funds out of the pension free of income tax may prove worthwhile, particularly if there is no current IHT liability. The same thinking may apply if the client is currently a basic rate taxpayer, but expects to become a higher rate one due to future pension entitlements.
2. CGT planning
This is something which may be of particular interest to those studying R03. Does your client have a substantial holding in a taxable investment such as an OEIC or a general investment account? Have they accrued a substantial CGT liability? If so, have you thought about the benefits of looking to crystallise some of their gains to use their £12,300 CGT annual exempt amount?
Within these types of investment, a fund switch is considered a disposal for CGT purposes. This is provided that the same investment is not repurchased within a 30-day window. Therefore, if your client were to switch to another fund with broadly similar characteristics and switch back after the 30 days has elapsed then you can reduce their CGT liability accordingly.
For a practical example of how this works, let’s consider a client who has an OEIC purchased at £50,000, which is now worth £100,000. A gain of £1 for every £1 invested. If that client were to sell £24,600 worth of their fund holding then the realised gain would be half of that, i.e. £12,300, which is in line with, you’ve guessed it, the CGT annual exempt amount. They use the proceeds to purchase another fund with similar characteristics. Then 31 days later, they sell the second fund and repurchase the first.
By following this course of action, the client is maximising the annual exempt amount, and will not incur a CGT liability. However, they are resetting the base value for CGT purposes on this portion of the funds. So instead of sitting on a £50,000 gain for CGT purposes, they are now sitting on £37,700. This could prove worthwhile in the long run, particularly if the client is a higher rate taxpayer. Rumours persist that the government may look to target the capital gains regime as a way of recouping some funds in the aftermath of the Covid-19 pandemic.
You can also use the annual exempt amount, at least in part, by selling the fund and repurchasing the same one within an ISA. Which brings us nicely on to…
3. Bed & ISA
One of the most basic tax planning measures out there. As we know, income from an investment fund is generally taxable, albeit possibly covered by the personal savings and/ or dividend allowances. Capital gains are also subject to the relevant tax regime.
Where that fund is held within an ISA, however, none of these taxes apply. Investments held within the ISA wrapper are free of UK tax within the fund. With £20,000 per annum available, if your client has unwrapped funds then one of the most basic things you can do to maximise tax efficiency is to get them ISA wrapped.
Even if the client has no unwrapped investments and doesn’t want to invest any further money at the present time, any cash savings can be moved into a cash ISA. It is true that the effectiveness of this is likely to be limited at present due to low interest rates, which mean that interest paid is likely to be covered by the starting rate for savings income and/ or the personal savings allowance in any event. However, you never know what may change in future and cash ISA funds can always be switched to a stocks and shares ISA in the future.
4. Pension Planning
Personal pension contributions can be very tax efficient if your client is a higher or additional rate taxpayer. Not only do they benefit from tax relief which can be as high as 45%, but subject to the lifetime allowance, they can take 25% of the resultant fund as a tax-free pension commencement lump sum.
Let’s say a higher rate taxpayer, who expects to be a basic rate payer in retirement, contributes the full £40,000 gross annual allowance. Rather than paying an income tax liability of £16,000, they can access £10,000 tax free and pay 20% on the other £30,000. This comes to a liability of £6,000 – a saving of £10,000. The benefits can be even more pronounced where the client is in the personal allowance trap. With the availability of carry-forward, it is sometimes possible to make an even higher pension contribution.
Making a contribution under the relief-at-source system can also be beneficial to non-taxpayers. Counter-intuitively, non-taxpayers also benefit from tax relief on personal pension contributions. This means that a non-taxpayer earning £10,000 could pay £8,000 into their pension and see it topped up to £10,000. Even clients (or their children/ grandchildren) with no pensionable earnings can contribute up to £2,880 net and benefit from tax relief of up to £720.
This one is a useful piece of knowledge for those studying for R03, R04 or R06.
5. IHT Planning
Whilst most gifts made to family members and some trusts are considered potentially exempt transfers, and hence take 7 years to be fully outside of the estate for IHT purposes, there are exceptions. Your client (and their spouse if applicable) is able to gift up to £3,000 per tax year, which is considered outside of the estate immediately. This can also be backdated one year. Hence, if neither client nor spouse has used the gifting allowance this year or last, that’s up to £12,000 which could be given away. This could potentially save IHT of up to £4,800.
The other allowance which could potentially be used is the £250 small gifting allowance. Under this, the client is able to make small gifts of up to £250 to any number of recipients, which will again be considered immediately outside of the estate for IHT purposes. The one caveat being that someone who has received a gift as part of the £3,000 annual allowance cannot then also be the recipient of a £250 small gift.
Gifting obviously has to be considered in context. Clients should not generally look to make gifts where the funds are essential to maintain their own standard of living in retirement. They also need to consider whether the proposed recipient(s) are likely to put the funds to good use. This is where trust planning may be able to assist. However, for clients with a lot of wealth and a potentially significant IHT liability, both of these allowances can prove a handy little tool.
6. EIS/SEIS/VCT investments
Enterprise Investment Schemes, Seed Enterprise Investment Schemes and Venture Capital Trusts. Whilst these schemes may operate in different ways, the core theme is that they look to fund smaller, early stage ventures and they benefit from some pretty significant tax breaks.
A client can invest up to £2m per tax year in an EIS, £200,000 into a VCT and £100,000 into a Seed EIS. These investments allow a relief of 30% of the amount invested (or 50% in the case of a Seed EIS) which can be deducted against the individual’s income tax bill for the year, provided sufficient liability exists to cover it.
In the case of both EISs and SEISs, this can also be carried back one year. Therefore, an investor placing the maximum into both types of scheme and carrying back one year could potentially obliterate up to £1.3m worth of income tax liability. The potential downside is that this will be clawed back if the investment is sold within the minimum holding period, which is 3 years.
It should be noted that these are specialist investments and should not be used solely for tax planning purposes. They are by nature speculative and high risk and are only appropriate for clients who have the appropriate risk profile to accept the potential losses as well as the potential gains. However, the tax breaks available are very generous for those who do fall into that category. Those of you who are studying for R02, R03 or R06 should look out for these as a potential question subject.
In conclusion
It is a core part of adding value under the annual review process that a good adviser and paraplanner considers the tax burdens a client, or their estate, may be subject to and any potential steps that can be taken to mitigate them. Whilst some of these steps may be relatively minor in isolation, over the course of a lifetime, the savings can run into hundreds of thousands, or even more in the case of specialist investments.
Act now and your client will thank you later.
