Last minute tax planning - what you should know
QUESTION: With the tax year end fast approaching, is there any last minute tax planning that I should be considering?
ANSWER: With just 10 days to go to the end of the UK income tax year on April 5 there is still time to undertake income and capital gains tax (CGT) planning to avail of any reliefs still unused.
The capital gains annual exemption is currently £11,300 and if unused it cannot be carried forward. Investors may consider “bed and breakfasting” shareholdings to effectively rebase the cost going forward subject to CGT bed and breakfasting rules.
There is currently a zero per cent band for dividends which amounts to £5,000 per annum however this will fall to £2,000 from April 6 and therefore shareholders, particularly in family companies, should consider maximising this relief before the end of the tax year.
Tax efficient investments in Enterprise Investment Schemes (EIS) are set to be significantly curtailed. Although the amount one can invest into an EIS is set to double from £1m to £2m from April 6, the government is going to significantly curtail the types of companies that can achieve EIS status such that more risky ventures are favoured and therefore anyone contemplating an EIS investment should act quickly especially given the fact that it can also be carried back into the previous tax year.
Tax relief for pensions has been considerably curtailed in recent years however individuals can still invest up to £40,000 per annum and receive tax relief at their highest rate provided their income does not exceed £150,000 (above this level of income the allowance is tapered by £1 for every £2 of income earned above £150,000).
In addition, provided one has been a member of a pension scheme it is possible to carry forward unused pension relief from the previous three years and therefore a much larger contribution could be made before April 6 provided the taxpayer has the earned income to cover the contribution. The contributions are made net of the basic rate tax credit and therefore a cheque only needs to be written for 80 per cent of the total contribution.
The buy to let sector was severely hit when the government announced a reduction in the amount of mortgage interest relief available for offset against rental income. This continues over the next two income tax years until April 2020 when relief will only be available at the basic rate of income tax.
A further complication arises in the way the income tax relief for buy to let debt is calculated resulting in the gross rental income before interest being taken into account when considered eligibility for matters such as child benefit, pensions, savings allowances and personal allowances.
For these reasons taxpayers with significant buy to let portfolios should consider reducing the debt on their portfolios and in certain cases incorporating the buy to let portfolio.
Many sole traders and partnerships have a March 31 year end and businesses with significant business profits which are exposed to the highest rates of income tax and national insurance should consider incorporation given the future corporation tax rate of 17 per cent commencing on April 1 2020. There also remains the possibility of the Northern Ireland corporate tax rate falling to 12.5 per cent if the current political impasse is resolved.
:: Paddy Harty (email@example.com) is director at PKF-FPM Accountants (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.