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With the end of the current tax year fast approaching, we have summarised below some of the key areas that should be reviewed ahead of the end of the tax year. Taking action now will allow you to take advantage of any exemptions, remaining reliefs and allowances.
For months there has been speculation that capital gains tax rates will go up in the forthcoming Budget, to help raise cash necessary to recoup the public costs arising as a result of the COVID-19 pandemic. The proposed changes include consideration to capital gains tax rates brought more in line with income tax rates which currently stand at 20%, 40% and 45%.
Please be aware that his note does not include speculation of any announcements which may be made in the Budget Statement on 3 March 2021 and reflects the legislation as it stands on 28th February 2021.
For married couples/civil partners, ensure each has sufficient income to use their personal allowance. The allowance is £12,500 for 2020/21. If you do not, consider gifting income producing assets to them to enable them to do so.
Reduce your taxable income if you are within the £100,000 to £125,000 group to prevent the 60% effective charge. Pension contributions and charitable donations are two ways you can reduce your taxable income.
Those who are able to control dividend payments, consider paying dividends to utilise the £2,000 tax free dividend allowance.
For married couples / civil partners you should ensure each has sufficient savings income to utilise the £500 or £1,000 personal savings allowance. [Note no allowance is available for additional rate taxpayers].
Annual ISA subscriptions should be maximised. The limit for 2020/21 remains at £20,000. The investment return from ISAs is free from income tax and capital gains tax.
The annual capital gains tax allowance of £12,300 for the 2020/21 tax year is very valuable. If you do not use it, it cannot be carried forward to the next tax year.
Consideration of selling assets to realise gains and increase the base cost for future sales. However, you will need to bear in mind anti-avoidance rules for shares and securities, which are subject to special rules where shares and securities are sold and repurchased on the same day or within the following 30 days. Any such planning needs to be in line with your overall investment strategy and investment advice should always be taken.
To ensure that each spouse/civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses/civil partners to facilitate this.
Capital losses must be claimed within 4 years of the end of the tax year in which the loss was realised. Capital losses realised during 2016/17 must be claimed by 5 April 2021. Capital losses can be carried forward and offset against future capital gains.
The CGT rate for higher and additional rate taxpayers is 20% for assets other than residential property and carried interest. Where Business Asset Disposal Relief (BADR) applies, a 10% CGT rate can apply to qualifying capital gains, up to a lifetime limit of £1million. If you expect to sell share in a trading company or a business asset, you should review whether BADR will apply and if the 10% CGT rate will be available.
Review your pension contributions to see if there is any scope to make further payments. Most individuals can make contributions of up to 100% of their earnings, capped at £40,000 each tax year. Higher earners with ‘adjusted’ income over £240,000 will have a reduce annual allowance and further advice should be sought. The minimum allowance will be £4,000.
If you do not use all your allowance in one year, you can carry it forward for up to three years. Any unused allowance for 2017/18 will be lost after 5 April 2021.
75th Birthday coming up? Remember that tax relief is only available on contributions made by individuals who are under 75.
For those who have no relevant earnings, you should not forget that you can make a net pension contribution of up to £2,880 and the government will add £720 basic rate tax relief, which can be a significant benefit.
Everyone has a £3,000 annual exemption to use each year. This is the amount individuals can give away without any inheritance tax implications. any unused exemption can be carried forward for one tax year only.
Small gifts of up to £250 made to an individual are also exempt each tax year.
Gifts made out of income on a regular basis can also be made without any inheritance tax implications. Gifts need to form a normal pattern of expenditure and that the retains sufficient income to maintain their normal standard of living, after the gift.
Review wills to ensure that they still meet your overall succession plan and are in line with current legislation.
We hope that you find this summary useful but do be aware that this only an outline of some of the options you could be considering and not all of the options covered will be suitable for everyone.
For more information on any of points raised below or formal advice on your specific circumstances, please just get in touch with us today.
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