Time for year-end planning is here!

6th February 2013

It may feel as if it were only last week that Mr Osborne was presenting his tax plans to Parliament, but it is already time to begin thinking about his next set piece – the Spring Budget – and, along with it, year-end tax planning. The Budget is scheduled for Wednesday 20 March, so your 2013 year-end tax planning should best be wrapped up before then, rather than waiting for the official tax year end of Friday 5 April (the end of Easter week).

The Chancellor’s 2012 Autumn Statement served as a reminder that the tax screws will continue to be turned in the years ahead, for example by limiting some tax band and exemption annual increases to under half the expected rate of inflation. The more the Treasury tries to extract revenue from you, the greater is the value of tax planning.  This does not mean contentious schemes based in offshore centres. As we explain below, there are many options to cut the Chancellor’s share which are effective, but uncontroversial.

Time of year-end planning is here

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Pensions
The Chancellor made two important announcements in his Autumn Statement which could have a direct impact on your year-end pension planning:

  • The Annual Allowance, which sets the maximum total tax-efficient contribution that can be invested in pension plans by you or on your behalf during the tax year, will be cut from £50,000 to £40,000 from 6 April 2014.
  • The Lifetime Allowance, which sets maximum total tax-efficient value of pension benefits, will fall from £1.5m to £1.25m, again from the start of 2014/15. One, or possibly two, new transitional reliefs will be introduced which you can claim if you could be affected by this further reduction.

Alongside these future cuts, there are three other factors to consider:

  • 2013 is the last tax year (for the time being, at least) in which it will be possible to obtain 50% tax relief on a pension contribution, as the additional rate of tax falls to 45% in 2013/14.
  • 5 April 2013 will be the last opportunity to carry forward up to £50,000 of unused annual allowance from 2009/10.
  • The Shadow Chancellor, Ed Balls, recently renewed calls to limit tax relief on pension contributions to basic rate only for high earners.

All these points mean you should review your pension now to decide on your future retirement strategy and what action, if any, needs to be taken before the end of 2013.

On the other hand, if you are thinking of drawing your benefits in the next few months, it may pay you to wait until much nearer to the end of the tax year. The Autumn Statement announced that the limit on capped income drawdown would be increased by 20%. Unfortunately no timing was given in the Statement, but the Treasury has since said that it hopes that the change will take effect for any newly initiated withdrawals from 26 March 2013.

Income Tax
There are several important changes to income tax from 6 April 2013 that could affect your planning, not only for the tax year end, but also for the new tax year about to start:

  • The full impact of the new tax on child benefit will be felt from 2013/14. In the current tax year, the maximum effective claw back is generally only a quarter of the benefit paid. If you or your partner’s income exceeds £50,000 then you will be affected if either of you receive child benefit. Do nothing and you could face a substantial tax bill in January 2015.
  • The additional rate of tax, payable on taxable income over £150,000, will be cut to 45% (37.5% for dividends) from 50% (42.5%) from 6 April 2013. It could therefore be worthwhile to defer payment of bonuses and/or private company dividends until the new tax year begins. Some publicly quoted companies with a large proportion of individual shareholders on their registers may also delay dividend payments for the same reason.
  • The personal allowance will rise by £1,335 to £9,440 in 2013/14. Where one of a couple has no earnings or pension income, much or all of the allowance may be wasted. If you or your partner is in this situation, there are several strategies which could be used to generate what is effectively tax-free income in 2013/14.
  • While the personal allowance is rising sharply next tax year, the starting point for higher rate tax is falling because the basic rate tax band will shrink by £2,360. This, and subsequent changes will drag many more people into the higher rate tax band. In the short term it might pay you to bring income forward, for example by closing an interest-paying account, if you are a basic rate taxpayer this year.
Individual Savings Accounts (ISAs)

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Individual Savings Accounts (ISAs)
The standard ISA contribution limit for 2012/13 is £11,280, of which up to £5,640 may be placed in a cash ISA. For the Junior ISA, launched a little over a year ago and largely ignored since, the limit is £3,600. The main ISA limit will rise by £240 for 2013/14 (£120 for the cash component), with the Junior ISA ceiling increasing by £120.

There are no carry forward provisions for ISA contributions, so maximising your investment each year is good practice. This need not mean finding cash – it is often possible to sell directly held investments and then repurchase them within the ISA framework. Not only does the exercise lead to your ISA being funded, it can also be a simple way of using part of your annual capital gains tax exemption.

The value of the income and capital gains tax shelter offered by ISAs has been increased by recent government announcements on the higher rate tax threshold and the CGT annual exemption:

  • There is no UK tax on dividends in a stocks and shares ISA, although tax credits cannot be reclaimed.
  • Interest is received UK tax-free in an ISA, other than from cash held in a stocks and shares ISA (for which a flat 20% rate applies).
  • There is no capital gains tax on profits.
  • ISA income and gains do not have to be reported on your tax return and are ignored for child benefit tax.

Despite these tax benefits, not all ISAs are attractive investments. In particular, the appeal of cash ISAs has fallen as the Bank of England’s Funding for Lending scheme has driven down short-term deposit rates. While variable rates of around 2.5% are on offer for new instant access ISAs, the quoted interest often contains a large bonus element as much as 2% – that disappears after a year. If you arranged a cash ISA around this time last year then with a rate of about 3% – you should check what interest your cash will be earning after the ISA’s first anniversary. You could find it is just 0.5%.

You can transfer an existing cash ISA to a stocks and shares ISA, but not vice versa. The one way trip can be worth considering if you want to increase your income. However, a move out of cash removes the security of a capital deposit, so should not be taken without advice.

Inheritance Tax (IHT)

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Inheritance Tax (IHT)
The Autumn Statement revealed that there would be an increase in the inheritance tax nil rate band. Alas, the increase will only be £4,000 and will not occur until 6 April 2015.  Until then the nil rate band will stay at £325,000, the level it first reached in April 2009. Inflation has already devalued the nil rate band (by nearly 15%) and will continue to do so.

With IHT seemingly frozen in time, the end of tax year routine of using the existing three main yearly IHT exemptions is also unchanged:

  1. The Annual Exemption – Each tax year you can give away £3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used afterthat year’s exemption has been exhausted.For instance, if you did not use the annual exemption in the last tax year, 2011/12, you can still use it by 5 April 2013, but only once you have fully used the 2012/13 exemption. Thus a gift of up to £6,000 (£12,000 for a couple) can escape IHT.
  2. The Small Gifts ExemptionYou can give up to £250 outright per tax year free of IHT to as many people as you wish.
  3. The Normal Expenditure ExemptionThe normal expenditure exemption can be the most valuable of the yearly IHT exemptions, particularly when combined with pension planning. A gift is exempt from IHT provided that you make it regularly, it is out of income (not capital) and its does not reduce your standard of living. Importantly, there are no cash limits for this exemption. You could give away dividend or interest income which would otherwise usually be reinvested, with the normal expenditure exemption covering the gift.

Capital Gains Tax (CGT)
After an overhaul of the structure of CGT in 2010, for 2012/13 the Chancellor froze the annual exemption at £10,600. In the coming tax year there will be a (CPI) inflation-linked increase, but then 1% rises will apply for the next two years. By 2015/16 the annual exemption will be £11,100. If you have gains that you can realise on your investments, you ought to think about using your annual exemption to crystallise some profits before 6 April.  Systematically using your annual exemption can help you to avoid the situation where accumulated gains make it expensive to adjust your portfolio.  This year’s annual exemption could save you nearly £3,000 in tax if you are a higher or additional rate taxpayer.

If you cannot avoid capital gains tax, then take care with the timing of your gains and losses:

  • A gain realised on 5 April 2013 will mean tax payable on 31 January 2014.
  • A gain realised on 8 April 2013 (after the weekend) will mean tax payable on 31 January 2015.

The realisation of losses also needs careful timing. The general rule is that losses are set against gains made in the same tax year before the annual exemption is applied. Thus you should avoid realising losses in the same year as that in which you realise gains unless your gains exceed the annual exemption.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)

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Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
The VCT and EIS rules have been subject to a number of changes for 2012/13, most of which are beneficial, for example an increase in the maximum size of eligible companies for investment. However, the future availability of both schemes is under a cloud because of a review by the Financial Services Authority of how they should be promoted.

The current tax benefits of VCTs and EISs are:

VCTs and EIS are high risk investments in small unlisted companies and should only form a small part of a well diversified investment portfolio. The investment risks involved are the main reason why the government is prepared to offer generous tax reliefs.

Action
The Budget is now less than two months away, so do not delay your year-end planning. Call a member of the Fortitude Financial Planning team to arrange your personal year end tax planning review. The sooner you contact us, the sooner we can begin work on your year-end strategy and any planning needed for the new tax year.