The latest version of our tax tables document has been published on the publications and useful links page.
End of tax year review for 5 April 2014
With the current tax year drawing to a close then now is a good time to make sure where possible tax relief’s and allowances available in this tax year have been used.
Detailed below is just a brief outline of the common areas that should be considered.
- Maximising pension tax relief bearing in mind that annual allowance (from £50k to £40k) and lifetime allowance (£1.5m to £1.25m) will reduce on6 April 2014.
- Additional pension payment to reduce taxable income in the higher rate tax bands (40% and 45%). This is especially important if income is within the marginal rate of 60% if total taxable income is between £100,000 and £118,880 as the personal allowances are reduced by £1 for every £2 of adjusted net income over £100,000.
- Although not taxable you should consider with your financial adviser whether to maximise the annual tax free ISA allowance.
- Consider disposing of chargeable assets to ensure annual exemption (£10,900 for individuals) fully utilised.
- If you are self employed and have a 31 March or 5 April year end then consider acquiring business assets before the tax year end so that Annual Investment Allowance (AIA) can be used. Although AIA for this tax year is £250,000 so unlikely to be fully utilised it may help reduce overall income within a higher rate tax band some of this allowance is utilised as detailed above in pensions.
- NIC deferment claim if multiple employments or combined self employment and employment and maximum NIC likely to be exceeded.
- Remember not to exceed £5,000 overdrawn loan account in before end of tax year as benefit in kind issues will arise.
- Make full use of lesser Inheritance Tax (IHT) relief’s which if utilised each year will help reduce an individual’s inheritance tax position such as:
- Annual gift exemption £3,000 which if not used in previous year can be carried forward to this year to make £6,000.
- Small gifts not exceeding £250 made to any one person in each tax year exempt from IHT.
- Gifts out of income –IHT exemption for annual expenditure out of income if certain criteria met.
This is not an exhaustive list and making use of tax relief’s and allowances is dependent on individual circumstances but if you consider any of the above may apply to you then please contact us for further advise to make sure that the rules applying to the above are followed.
Inheritance Tax – Gifts made from income as part of normal expenditure
Following on from the previous online article Inheritance Tax – Make use of lifetime exemptions, further information is detailed below to explain the rules concerning gifts made from income.
Gifts that are made as part of the donor’s normal expenditure, if accepted, will be exempt from Inheritance Tax (IHT) and it is possible that significant tax savings can be obtained from this type of gift if it is supported with information to meet the following criteria:
- 1: The gift must form part of the donor’s normal expenditure;
- 2: It must be made from the donor’s income; and
- 3: It must leave the donor with sufficient income to maintain their normal lifestyle.
In order to meet the first criteria you must show that the gift is part of the donor’s settled pattern of expenditure (habitual gifts rather than special) and not irregular amounts or to various individuals. This can be established by keeping a record of expenditure over a period of time (see below) or the donor making a commitment and thereafter complying with it.
The type of gifts made from income can include:
- Monthly or other regular payments to someone;
- Regular gifts for Christmas, birthdays or wedding /civil partnership anniversaries; and
- Regular premiums on a life insurance policy for you or someone.
The donor’s income in the second criteria must not include capital but will include income after tax such as earnings (employed/self employed), pensions, and property income etc.
The third criteria means that after making the gift, the donor must be left with enough income to maintain their normal standard of living. As everyone has different lifestyles then you will need to establish the normal living expenses in order to assess the surplus income that was available at the time gift was made. If you do not have sufficient income for normal expenditure and you reduce capital to meet these living costs at the time of the gift then the exemption will be lost.
In order to obtain this type of gift exemption, it is important that a record is kept of income and expenses and there is a specific IHT form 403 which includes a schedule for this purpose. This form is usually for the executors etc. to complete but is a useful schedule if planning to reduce Inheritance Tax, as it will assist you in keeping sufficient records over a period of time to show these gifts were made out of income and obtain IHT exemption.
It would be advisable to seek professional advice in this area so please contact us for any of your IHT planning needs.
Inheritance Tax – Make use of lifetime exemptions
Some basic inheritance tax (IHT) planning can save substantial amounts of tax. Everyone when they die is able to leave assets free of tax with a value up to the Inheritance Tax threshold (nil rate band) of £325,000 for 2013-14. This threshold is currently frozen until 2017-18. If the value of your estate exceeds the nil rate-band then you will be subject to tax at 40% on the excess.
Gifts made to individuals will be exempt from Inheritance Tax as long as you live seven years after making the gift. If you die within the seven years then the gift maybe subject to Inheritance Tax. These gifts are known as Potentially Exempt Transfers (PETS).
If you give an asset away at anytime but still retain an interest in it, then the gift will not be a potentially exempt transfer (PET).
Some gifts are exempt from Inheritance tax even if made within seven years of death. One way to reduce the tax liability is to make full use of these lifetime exemptions or gifts. The following transfers available to tax payers which are exempt from inheritance tax are detailed below:
Annual exemption - £3,000 can be given away each year and be exempt from Inheritance Tax. Any unused part of the £3,000 exemption can be carried forward to the next year but only for one year. If you don’t use the carried forward amount in that year then the exemption expires.
Small Gifts Exemption – small gifts up to the value of £250 to any one individual can be made per tax year - these small gifts are not counted towards the annual exemption but you can’t use small gifts allowance together with any other exemption when giving to the same person. You can’t give more than £250 and claim that the first £250 is a small gift and if you do the small gift exemption is lost altogether.
Gifts to charities and UK political parties – Gifts can be made to charities and political parties free of inheritance tax. It must be a qualifying charity established in the EU or other specified country. The UK political party must have at least two elected members to the House of Commons or one elected member (with the party having at least 150,000 votes). Certain national institutions such as museums, universities and the National Trust may qualify for exempt IHT gifts.
Gifts to your husband, wife or civil partner – Gifts to spouse or civil partner can be made exempt from Inheritance Tax as long as they have a permanent home in the UK.
Gifts on consideration of marriage – Wedding or civil partnership ceremony gifts that are made on condition of marriage/civil partnership agreement can be made free from Inheritance Tax with the exemption amount dependent of donor’s relationship with the couple as follows:
£5,000 - gift from parent
£2,500 - gift from grandparent or remoter ancestor (great grandparent)
£2,500 – gift from bride/groom to each other
£1,000 - gift from anyone else
In order to obtain the exemption, the gift must be conditional and be made (or the promise to make gift) on or shortly before the marriage ceremony.
Gifts from normal income– regular gifts that are made from income (after tax), such as earnings and pensions, which leaves enough income for your normal life style are exempt from Inheritance Tax. This does not include gifts made out of capital. Further information will be provided in next online article.
Gifts for family maintenance – These include maintenance payments for:
Your husband, wife and civil partner
Your ex spouse or former civil partner
Relatives who are dependent on you because of old age or infirmity
Your children, including adopted and step- children who are under 18 or in fulltime education
Please contact us if you would like further advice on all aspects of IHT planning.
