Tax Planning for you (and the family)
Utilising all the allowances you are entitled to, is the best way to ensure you only pay your fair share of tax. Tax planning strategies are most effective when actioned in real time and monitored on an ongoing basis for effectiveness and efficiency. So, there’s no time like the present to review your personal tax position and that of your family, says tax expert and Richardson Swift director Calvin Healy.
Major changes from April this year that could affect the tax you pay:
- Capital Gains Tax allowance has been halved.
- Dividend allowance halved.
- 45% higher rate tax band to be introduced for earnings over £125,140.
- Personal allowance frozen.
Making the most of your income
Since April, the point at which you start paying the higher rate of tax has been reduced to £125,140. At this point, you will not only be hit by the loss of any personal allowance – which tapers on income over £100,000 - you will also now be paying 45% of your earnings to HMRC. Indeed, it can be worse than that if your income is between £100,000 and £125,140 as the “real” tax rate in that bracket is 60%! So, taking steps to reduce taxable income to below these levels is the best way to avoid a hike in your tax bill.
Increasing your pension contributions or gifting to charity might be an effective way to do that. There are also tax-efficient investments that could be contemplated such as Enterprise Investment Scheme or Venture Capital investments which can act as a 30% tax credit reducing your tax bill for the year.
Alternatively, you could consider transferring an income-generating asset to a spouse with a lower income, deferring income to a later tax year, or making Gift Aid payments.
No tax is payable on transfers between married couples or civil partners, unless you are formally separated, in which case specialist advice is required.
You could replace investments that provide taxable income and gains with tax-free investments such as ISAs or investment bonds that allow valuable tax deferment. Speaking to a financial adviser will help you decide what investments work best, based on your specific circumstances.
Changing the distribution of investment capital between spouses/civil partners may help to reduce the tax incurred on income and capital gains. Again, transfers between married couples and civil partners will not incur tax.
Children
Each child is entitled to a personal allowance, so it may be worth taking advice on generating income or Capital Gains on behalf of children as a means of saving tax. Parents who transfer assets with income of over £100, will still be liable to the tax, but this is not the case for grandparents. Also, a parent could use a ‘bare trust’ to allow the use of the child’s CGT entitlement in some circumstances.
Capital Gains Tax
For most people, the Capital Gains Tax allowance will be cut from £12,300 to £6,000 in April this year and again to £3,000 from April 2024. Any assets that are sold at a loss can reduce gains for the year or be carried forward and set against future capital gains.
Importantly though, any of the annual exemption not used cannot be carried forward and will be lost. Assets can be transferred between spouses and civil partners tax efficiently prior to being sold to ensure both exemptions are used fully.
Inheritance Tax
Individuals have an annual Inheritance Tax-free gift allowance of £3,000. This means you can give away up to this amount and there will be no tax charged on it should you die.
You can also make gifts out of surplus income tax free and also make further small gifts up to £250 to an unlimited number of recipients each tax year, free from Inheritance Tax (IHT). This only applies if the recipients have not received any part of your £3,000 IHT-free gift allowance.
In addition, you can give wedding gifts up to £5,000 to a child, £2,500 to a grandchild and £1,000 to anyone else.
So, giving money to children or other family members during your lifetime is a great way of supporting them and avoiding paying more money than necessary to the taxman out of your estate.
It is also useful to think about structuring your overall estate efficiently, not only for IHT but for all other taxes. This is an area that more and more clients are interested in exploring, particularly in times of rising taxes on top of current cost of living increases.
If you want further advice on these key areas, contact Calvin on hello@richardsonswift.co.uk
or by phoning 01225 325580. Bath-based Richardson Swift specialise in building life-long relationships with clients and their families, getting to know their goals and aspirations, so tax and financial planning needs and be anticipated and prepared for.