Whilst most of us have already forgotten about the New Year’s resolutions made only a few weeks ago, we set out below a few resolutions/tax planning suggestions which you may wish to implement and, unlike the promise to go to the gym more often, stick to.
Plan ahead for the new dividend tax
From 6 April 2016, the first £5,000 of dividend income will be tax free; however dividend income above this will suffer a higher effective tax rate than it does currently, an increase of 7.5% for all taxpayers.
For example, those taxpayers who pay income tax at the top rate of 45% will see an increase in the effective tax rate on dividend income from 30.6% to 38.1%.
This change will impact on many small business owners who have chosen to incorporate and extract profits from their business by way of dividend. To plan around this, where possible you may wish to bring forward the payment of dividends from 2016/17 into 2015/16, taking into consideration that this will accelerate tax payments and impact on company cash-flow.
Changes for landlords
Landlords who rent out fully furnished properties have been able to claim 10% of the rental income as a deduction instead of the actual cost of any replacement furnishings etc. However, from April 2016 this 10% “wear and tear allowance” will no longer be available; landlords will only be able to claim for the actual amount spent on replacing furnishings during a tax year.
Therefore, where practical, it may be beneficial to defer the replacement of furnishings until after 6 April 2016.
It is also worth remembering that from 6 April 2017 the interest relief on buy-to-let mortgages is to be gradually phased out and from April 2020 relief on the interest will be limited to the basic rate of tax. If this is likely to impact on your tax position, you may wish to start to plan for this change now.
Pension contributions
There is an annual limit of £40,000 for pension contributions. It is also possible to carry forward unused annual allowances for up to three years to offset against a contribution of more than the annual limit.
For some individuals the effective tax relief on contributions may be as high as 60% where income is greater than £100,000. Pension payments also attract higher rates of relief where they have the effect of preserving your child benefit.
From 6 April 2016 the annual limit of £40,000 is to be tapered down to a minimum allowance of £10,000 for those earning £150,000 or more.
You may wish to look at utilising this years unused relief and the unused relief brought forward and seeing what the impact would be on your overall tax position.
Investments
The ISA allowance for 2015/16 is £15,240. All of the income on ISA accounts is free of UK tax, as are any gains, so it makes sense when purchasing investments to do so through an ISA, where possible. An Innovative Finance ISA is to be introduced from 6 April 2016 and this will allow you to bring peer-to-peer lending within the ISA net.
Your annual CGT allowance for 2015/16 is £11,100 which you should consider utilising before the 5 April. Where gains of more than £11,100 have already been realised you may wish to look at realising those investments standing at a loss to reduce your CGT exposure.
Inheritance Tax (IHT) planning
IHT is payable on the chargeable value of your estate on death to the extent that it exceeds the “nil rate band”, currently set at £325,000. An additional nil rate band, initially set at £100,000, will be introduced from 2017/18 where a main residence is left to direct descendants, with similar provision being made for those who downsize or sell.
Several types of asset qualify for 100% agricultural or business property relief from IHT once held for two years, for example shares in private trading companies (including AIM listed shares), and trading partnerships. You may therefore wish to consider investing surplus cash into business/agricultural investments which may qualify for one of these reliefs.
You should also look at making use of the annual £3,000 gift allowance.
In addition, the changes introduced in 2015 now make it more attractive to pass on your pension fund on death. This has resulted in many people revisiting their current plans and updating their Wills and letters of wishes to ensure their families get the full benefit of any pension funds remaining on death. Retired individuals with significant funds invested outside their pension, may also wish to consider reducing their future pension drawings and living off their other income so that they can pass on the maximum amount of pension capital to their beneficiaries in a tax-efficient manner.