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Year-end tax planning: No time like the present

This week will see the end of the 2017/18 financial year on 5 April, as we transition into 2018/19. Ahead of the 6 April, you should be looking to tie up any lingering loose ends and aspiring to ensure that allowances and reliefs available to you have been utilised effectively. You should also familiarise yourself with the various changes, effective 6 April, that may impact upon your financial position in the year ahead.

By prioritising the ‘crossing of T’s and dotting of I’s’ before the financial year is out, you can rest-assured that you will be putting your best foot forward in the next! Here, we identify some of the things you should be thinking about when it comes to effective tax planning:

The Dividend Allowance

Currently, following changes to the way dividends were taxed in 2016, you can extract £5,000 from company profits before tax is payable. As of 6 April, the allowance will fall to £2,000. Consequently, those utilising it will likely see tax increases in the next financial year. As with any tax, careful planning and a thorough review of your position can help to mitigate the impact of these changes. You can read more about the impending dividend allowance cut in our article here.

Personal Taxes

Capital Gains Tax – The annual Capital Gains Tax (CGT) allowance will increase from £11,300 to £11,700 from 6 April 2018. It’s important to note that the allowance cannot be carried forward from one financial year to the next. You should, therefore, endeavour to crystallise gains each year to the full extent of the allowance to avoid missing out. The rate of Capital Gains Tax (CGT) is 10%, where taxable gains and taxable income total less than £33,500. Beyond this, the rate is 20%.

Income Tax Personal Allowance – The Personal Allowance (PA) determines how much you can earn before paying income tax. For 2018/19, the PA increases from £11,500 to £11,850 and the higher-rate threshold from £45,001 to £46,351. Bear in mind though, that for every £2 that income exceeds £100,000, the PA is reduced by £1. Consider assessing your income annually to ensure you’re getting the most out of your personal allowance.

ISA’s, LISA’s and Pension Pots

ISA’s – The ISA allows you to make an annual maximum investment of £20,000 into a tax-free savings pot; an allowance which renews each year on 6 April. With only 2 days left to invest for 2017/18, as part of your tax planning, consider whether you have used this year’s allowance effectively.

LISA’s – The LISA facilitates saving but also awards you with a 25% Government credit. If you are aged 18-40 you can invest up to £4,000 each year and earn a £1,000 top-up from the Government. The resulting funds can be used to purchase your first home or to save for retirement.

Pensions – Pension contributions must be paid on or before 5 April 2018 for them to be relieved against 2017/18 income. You can invest a minimum of £3,600 and up to £40,000 per year and you may carry forward up to three years of unused allowances. The Lifetime Allowance (LTA) was reduced in April 2016, from £1.25m to £1m, but it will now increase in line with inflation. This means that from 6 April 2018, the LTA for 2018/19 will be £1.03m. Pension contributions can be an effective tool when it comes to minimising your liabilities; however, you should seek professional advice before investing so that you can be confident you are making the right decision.

Tax Relief for Landlords

Changes announced in 2016 are currently being phased in, whereby mortgage interest tax relief for landlords is slowly tapered. From 6 April 2018, landlords may only offset 50% of the interest payments against their rental income. Instead, landlords can benefit from a flat rate tax relief at 20%. This is also being phased in, so only half of the 20% can be offset from April 2018.

Starting up or planning your exit?

If you are seeking to exit a business in the next financial year, you should consider when and how the exit will take place. Equally, if you’re thinking of starting your own business it is important to consider which is likely to be the most suitable structure; whether sole trader, partnership, limited liability partnership or limited company. The decisions that you make throughout the lifecycle of your business will impact upon your future financial position. Consequently, they are worth putting some serious thought into.

Inheritance Tax

Annual exemption – The annual IHT exemption is £3,000. This is the amount individuals can give away each tax year, without any IHT implications. If you fail to utilise the 2017/18 exemption, you may carry this forward. This means that up to £6,000 can be given away tax-free in 2018/19.

Nil-rate bands – The IHT nil-rate band will remain frozen at £325,000 until 2020/21. The additional nil-rate band, introduced in 2017, is worth £125,000 per individual from April 2018 (increasing from £100,000 in 2017/18). This means that a main residence with a value of up to £450,000, or £900,000 for married couples or those in a civil partnership can be passed, on death, to a direct descendant without any consequence.

At all times, thorough and careful tax planning is vital if you are to ensure that your affairs are handled in a tax-efficient manner. Despite this, many businesses remain in the dark about the reliefs and allowances that are available to them and, indeed, how to apply them correctly, as referenced in our article ‘Time to prioritise tax planning’, here. Discussing your plans and ideas with a tax advisor or accountant could help you to significantly reduce your liabilities.

So, if you’d like to talk to one of our team about effective tax planning, no matter what stage your business is at, please contact us today, or you can fill in one of our online enquiry forms here. You can also find helpful tax fact sheets and tables in our resource centre, here.

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