Jam Today 26 October 2017 By Tom Foster Tax Director Lewis Brownlee Chartered Accountants
Agenda An overview of our tax system, how it stands Consider reliefs and allowances Cover CGT, IHT and Trusts Aim to help ensure maximum tax efficiency
Income tax
Income tax
Income tax This has become somewhat complicated in recent years! New dividend and savings allowances Interest no longer taxed at source No notional tax credit on dividends Personal allowance if adjusted income no more than 100,000
Tax system Savings Dividend 11,500 10,000 Per.All ( 11,500) Div.All ( 5,000) Taxable @ BR 7.5% 5,000 Tax of 375
Tax system Savings Dividends 11,500 10,000 Per.All ( 6,000) ( 5,000) Sav.All ( 1,000) 0% Rate ( 4,500) Div.All ( 5,000) Taxable @ BR 0
Tax system Pension 10,000 Interest 12,500 Dividends 10,000 Personal Allowance (10,000) (1,500) Savings Allowance (1,000) 0% Starting rate (5,000) Taxable at 20% 5,000 Dividend Allowance (5,000) Taxable at 7.5% 5,000
Tax efficient investments ISAs Annual allowance now 20,000, combining cash and stocks. Also Junior ISAs and Lifetime ISAs. Potential to acquire a significant amount in a tax free environment. If have 200,000 saved when interest rates 4%, this would provide 8,000 tax free income.
Tax system How much tax free money could a married couple receive in a tax year? A. 23,000? B. 25,000? C. 35,000? D. It depends?
Tax system Husband Wife Pension/salary 11,500 11,500 Interest 6,000 6,000 Dividends 5,000 5,000 ISA Portfolio 5,000 5,000 Rent a Room 3,750 3,750 Sale proceeds 11,300 11,300 Total at least 85,100 Need to be able to utilise all available allowances and reliefs though!
Preserve the tax allowance Personal Allowance is reduced by 1 for every 2 that net adjusted income exceeds 100,000 by. Personal Allowance worth 4,600 to a higher rate tax payer. Net adjusted income is gross income less pension contributions and charitable gifts.
Preserve the tax allowance Use Pension Contributions; For example With no contributions Taxable income 125,000 Tax liability 43,300
Preserve the tax allowance Use Pension Contributions; For example With 20,000 net contributions Taxable income 125,000 Tax liability 35,700 Tax saving 7,600 In other words can boost pension fund by 25,000 at effective cost of 12,400
Other tips For married couples, ensure income generating assets owned effectively. Can make charitable gifts and elect to carry them back this could be useful if you find you have a nasty marginal tax rate. Could make tax efficient investments (e.g. EIS, VCT)
Other planning opportunities State pension : to defer or not to defer? Deferred payment payable as a lump sum. Taxed at marginal rate in year of receipt. Investment bonds and chargeable event gains average gain determines tax rate payable on entire gain. Can be a lot less tax to pay if gain incurred whilst basic rate taxpayer.
More Tax efficient investments EIS SEIS VCT Investment 1m 100k 200k Income tax relief 30% 50% 30% Dividends taxable Yes Yes No Income loss relief Yes Yes No CGT deferral Yes Yes* No BPR available Yes Yes No *SEIS reinvestment relief also reduces CGT liability of same year
Capital Gains tax Make use of the 11,300 annual exemption. Be wary of the effect of losses in same year. If part selling a holding in a specific company, consider share matching rules. There is a concept of pooling and bed and breakfasting anti avoidance measures.
Trusts Most trusts now taxable as mainstream trusts Exceptions include trust with vulnerable beneficiaries, such as bereaved children or those with disabilities Settlement in trust is a lifetime transfer. Lifetime IHT at rate of 20% will be payable should value of amount settled in trust exceed settlor s available nil rate entitlement Trust subject to 10 yearly anniversary and exit charges Trusts liable to highest rates of income tax
Trusts Can still be effectively used for IHT planning Main advantage is ensuring protection of wealth. Trustee has discretion as to when to distribute to beneficiary Assets can be protected from claims against beneficiary, e.g. following failed marriage Main residence relief can be claimed if beneficiary occupies property. Could be good way to help young persons onto the property ladder
IHT - Reliefs Business Property Relief (BPR) Agricultural Property Relief (APR) Reliefs reduce the taxable value of an individual s Estate Relief available if assets qualified at time of death or when assets gifted if donee still owns at time of death, if within 7 years
IHT - Reliefs Business Property Relief (BPR) A business or interest in a business 100% Unquoted shares in trading company 100% Shares in quoted company (if has control) 50% Land and property used for purposes of trade of owners business (need controlling interest If used by company) 50%
IHT - Reliefs Agricultural Property Relief (APR) 100% relief could be available against agricultural value of the land Available for the following : Agricultural land or pasture Woodlands Farmhouses, cottages and buildings Growing crops when transferred with land Stud farms engaged in breeding and rearing of horses and the land for grazing
IHT - Reliefs Agricultural Property Relief (APR) APR is available at 100% if land let and used for agricultural purposes, and At the date of the transfer owner has the right to vacant possession or could obtain it within the next twelve months Land was let on a grazing licence Property is let on a tenancy beginning on or after 1 September 1995 Otherwise relief is available at 50%.
Summary The keys to tax efficiency Make use of allowances and reliefs. Having different sources of income helps. Preserve entitlement to the tax allowance. Married couples could share income generating assets in efficient manner. Use CGT annual exemption. Use tax efficient investments.
Any Questions? Tom Foster tfoster@lewisbrownlee.co.uk Lewis Brownlee Chartered Accountants Appledram Barns Birdham Road Chichester 01243 782423