The last thing you are likely to want to think about is tax after just submitting your tax return for 2015/16, however, planning ahead before the start of the new tax year could pay dividends! We have highlighted below our top ten tax planning tips to consider pre April 2017.
1. With mortgage interest relief for landlords restricted to the basic rate being phased in from April 2017, you could end up with a higher tax bill than expected without any advance planning. There are several ways to minimise the impact of the new rules including incorporation, spousal transfers, use of partnerships etc.
2. From April 2017, an additional inheritance tax nil rate band of £100,000 will be available on death when a residence is passed to a direct descendent. This allowance will increase by £25,000 each year until it reaches £175,000 in 2020 but is tapered away for estates valued over £2million. We would recommend a review of your Will to ensure this, and any other tax reliefs, will be available, as well as considering any planning to reduce your estate where appropriate.
3. Pension contributions can help to reduce income to avoid higher tax rates and the child benefit tax charge. It has been mooted for a while that tax relief for higher and additional rate taxpayers may be restricted so pension contributions prior to the March Budget could be considered. Companies may wish to accelerate employer pension contributions to maximise corporation tax relief before the drop in rates (see ‘4’ below).
4. Now is a good time to review your operating structure to make sure it is tax efficient and operationally effective for your business. With the corporation tax rate reducing to 19% from April 2017, incorporation could be an option but this would need to be weighed up with the higher dividend rates that have been introduced.
5. If possible you should make full use of your ISA allowance, which is £15,240 for the 2016/17 tax year. Although the investment itself doesn’t attract any tax relief, any income generated from it will be tax free. Note, however, that the annual allowance is increasing to £20,000 from April 2017, so you will have plenty of opportunity to save then if you do not have surplus funds available at the moment.
6. If you have any surplus cash, you could look to make a tax efficient investment. There are various options which typically offer income tax relief at 30% (but can be as high as 50%) and with tax free capital gains on disposal. It may also be possible to carry back an investment made in 2016/17 to 2015/16 to accelerate tax relief.
7. As the personal allowance is reduced by £1 for every £2 of net income over £100,000, those with income of between £100,000 and £122,000 could end up paying tax at an effective rate of 60%. If your income is close to the threshold it may be worth considering ways to reduce your taxable income. This could be achieved by making pension contributions, charitable donations, deferring income into 2017/18 or transferring income producing assets to your spouse.
8. Taxable income exceeding £50,000 for the year could lead to a claw back of child benefit. Once taxable income reaches £60,000 the benefit will be lost in full. Reducing, deferring or transferring taxable income as described under ‘7’ above could help to preserve this benefit.
9. Owner managed businesses should review their remuneration package in advance of the new tax year. A combination of low salary, high interest and dividends could result in tax free income of up to £22,500 (and double that for couples) in 2017/18 if structured appropriately and depending on the individual’s circumstances.
10. The Capital Gains Tax annual exemption for all individuals for 2016/17 is £11,100, which you should try and use, if possible. Consideration should be given to the transfer of assets between spouses such that both utilise their annual exemptions on a subsequent disposal. There are a number of other pre 6 April 2017 planning opportunities.
If you would like to find out more, please get in touch with your usual tax contact or call 01242 237661.