Private Clients - 12 Mar 2018
With the new UK tax year fast approaching the article below highlights some changes for the forthcoming tax year and some action which may be required before the end of the current tax year. Not all the suggestions below will be suitable for everyone and you should seek advice before implementing any planning.
1. Personal allowance preservation
Individuals with income over £150,000 will be taxed at 45%. However, because the personal allowance is reduced by £1 for every £2 of income above £100,000, once your income exceeds £123,000 your personal allowance will be removed entirely. The claw back means that for income between £100,001 and £123,000 the effective tax rate will be 60%. Individuals with income near these thresholds may be able to reduce their income below £100,000. This can be achieved by making pension contributions, making payments to charity or gifting income producing assets to your spouse.
The rules surrounding the taxation of dividends changed in 2016/17 to take away the notional tax credit and replace this with a tax-free dividend allowance of £5,000. This is reducing to £2,000 for 2018/19. If the allowance might not be fully used and an individual’s personal company has sufficient distributable reserves it may make sense to pay an extra dividend before 6 April 2018 if the tax free allowance has not been fully utilised.
Over the last few years the pension rules have introduced more flexibility but also become increasingly complex. Taxpayers should ensure that they have not over contributed in 2016/17 and assess whether their planned contributions will remain within their allowance for 2017/18. As a general rule tax relief is available on pension contributions on the higher of an individual’s net relevant earnings (broadly employment income or trading profits) or £3,600. However tax relief will be clawed back where the pension contributions exceed the £40,000 annual allowance. This can be increased if the individual did not use up their allowance in the preceding 3 years.
From 2016/17 onwards the annual allowance is reduced by £1 for every £2 of “adjusted income” over £150,000 down to a minimum annual allowance of £10,000 once your annual income exceeds £210,000. Adjusted income is the total gross taxable income from all sources plus employer pension contributions. If a taxpayer breaches the rules and contributes too much they will be subject to an annual allowance charge. In some circumstances it is possible to ask the pension scheme administrator to pay the annual allowance charge from the pension savings but a request that they do so must be made by 31 July following the end of the tax year.
4. Rental properties
From 6 April 2017 significant changes were made to the way in which rental profits will be calculated on residential property. The most fundamental change affects the restriction to the tax deduction for finance costs such as mortgage interest. The changes are being phased in over four years and for the 2018/19 tax year the deduction for mortgage interest will be restricted to 50% with the remaining 50% being given as a basic rate credit. This change will significantly increase the tax payable on the rental profits for higher and additional rate taxpayers who have highly leveraged property portfolios.
The restrictions to interest deductions currently only apply to residential properties owned by individuals. If a UK company owns the property full tax relief would be available on the interest payments. For individuals considering purchasing a property or transferring a property to a company advice should be sought as there are other tax implications to consider.
5. Charitable giving
It is possible to make cash gifts after the 6 April and treat as paid in the current tax year (subject to the payment being made before 1 February 2019 and before the 2017/18 tax return has been filed) this means that there is no immediate need to make a cash donation before 6 April. Individuals who have appreciated assets with unrealized gains in excess of their capital gains annual exemption might achieve a greater overall tax saving by donating the asset to charity in lieu of cash thus obtaining income tax relief and avoiding capital gains tax on a disposal (i.e. a double benefit). There is, however, no ability to treat such contributions as made in the prior tax year so individuals considering this would need to contribute the asset prior to 6 April. Please do check with your tax advisor whether the asset will definitely qualify for income tax relief.
For individuals with both US and UK taxable income consideration should be given to donating (cash or appreciated assets) to a dual qualifying charity as this should optimize the taxpayer’s position. If the desired charity does not have a dual qualified entity then consideration should be made to donating through a Donor Advised Fund.
6. Individual Savings Accounts
Taxpayers should consider fully utilizing their annual ISA allowance (currently £20,000) before 6 April. A Junior ISA limit of £5,000 applies to those below 18. Even if the taxpayer is an American/Green Card holder an ISA could be advantageous but such taxpayers should avoid holding any investments which might be categorized as ‘Passive Foreign Investment Companies’ (PFIC’s).
7. PAYE coding notices
While not directly reducing an individual’s tax liability, employed individuals should check that their coding notice is correct for the forthcoming year to ensure there are no surprises at the year end.
Most individuals are entitled to an annual exemption (£11,300 in 2017/18 and £11,700 in 2018/19) which means than no capital gains tax is payable on gains up to that amount each year. If the annual exemption for 2017/18 has not been utilised they should discuss with their investment adviser whether there are any investments with unrealized gains which might be suitable for disposal. If undertaking this strategy taxpayer’s should be aware it will be ineffective if they repurchase the same asset within 30 days. If the taxpayer wishes to maintain market exposure during that window they consider purchasing an asset in the similar class or having their spouse purchase the asset.
Where an individual owns more than one property they should nominate, within 24 months of acquiring a second residence which one is to be their main residence. An individual’s main residence is exempt from UK capital gains tax. If you have acquired a second property in the last 24 months you should seek advice as to whether a nomination is required.
Inheritance tax is charged on death at 40% on the value of the person’s estate to the extent that it exceeds their available nil rate band. Each tax year it is possible to give away £3,000 IHT free. Any unused allowance can be carried forward for a maximum of one year. Small gifts of up to £250 can be made to as many people as the individual wishes each year. Regular gifts out of income can be made each year but advice should be sought prior to making such gifts.
Most other gifts will qualify as potentially exempt transfers and will be exempt from tax if the donor survives seven years from the date of the gift.
A gift of 10% or more of your net estate to charity on death can reduce the IHT rate from 40% to 36%
1. Deemed Domicile
New rules came into effect from 6 April 2017 which introduced the concept of deemed domicile for UK income and capital gains tax. Once an individual has been resident in the UK for at least 15 of the last 20 tax years they will be deemed domiciled. This means that they will be taxable on an arising basis on their worldwide income and gains. Individuals who will be deemed domiciled from 6 April 2018 should urgently seek tax advice to ensure that their affairs are structured in a tax efficient manner. This is particularly important for US individuals who have assets in structures such as LLC’s. Other things which should be considered are:
2. Mixed Fund Cleansing
The mixed fund cleansing opportunity is only available until 5 April 2019. If an individual has funds in overseas bank accounts which are mixed (i.e they contain more than one type of income, capital gains or capital) it is possible to analyse the constituent parts of the account and transfer the different parts to different foreign bank accounts. This means that if an individual has a bank account which has clean capital trapped behind income or capital gains they may be able to access the clean capital which can then be brought to the UK tax free. There are strict rules which must be adhered to in order for the cleansing to be effective and therefore advice should be sought before any cleansing is undertaken.
A US Citizen or green card holder should consider their US tax position before undertaking any tax planning. The use of UK exemptions and allowances can often merely shift the liability to tax from the UK to the US. Individuals should seek advice to understand the consequences in both jurisdictions before making any changes to their current situation.
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