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An early start to year-end tax planning

By December 3, 2019 No Comments

By the time 2019 ends, it is almost certain to be an unusual year from a tax viewpoint: there will have been no Budget. That contrasts with recent times when, on occasions there have been what felt like three Budgets: one pre-Election, one post-Election plus a third quasi-Budget masquerading as an Autumn Statement.

The 2019 Autumn Budget was due on 6 November, but the announcement of the General Election meant that it had to be postponed. The gap between the 12 December Election date and Christmas means that the Treasury looks set to extend ‘Autumn’ well into January.

The first Budget after the Election…

If you were a newly (re-)installed Chancellor, when would you choose to introduce any tax changes most likely to provoke controversy (and probably not explicitly mentioned in your party’s recent manifesto)? The obvious answer is in your first post-Election Budget when you are, by definition, furthest away from your next visit to the polls. Research by the Institute for Fiscal Studies ahead of the 2015 Election noted that “there is a tendency for elections to be followed by substantial tax increases: every general election since 1992 has been followed within 12 months by an announcement of more than £5 billion (in 2015/16 terms) of net tax rises”.  

…so, start planning now

Philips Hammond’s move to Autumn Budgets largely broke the link between tax-year end-planning and Budget date. For what might be one year only, the connection has been restored. There is a familiar year-end list to consider, although, as usual, it is not identical to the previous year’s because of in-year changes and announcements of possible future reforms:

  • ISAs

There are four important tax benefits which are common across the different types of ISA:

  • Interest earned on cash or fixed interest securities is free of UK income tax.
  • Dividends are also free of UK income tax.
  • Capital gains are free of UK capital gains tax (CGT).
  • There is nothing to report on your tax return.

Those tax freedoms could become more valuable after 12 December. If you have not yet made your 2019/20 ISA contribution (overall maximum £20,000), now could be a good time to do so. Remember, a few years ago, the Treasury researched placing a cap on the total investment in ISAs. Income tax relief on ISAs now costs £3.3bn a year, nearly a third more than five years ago, making it a tempting target.

If you – or your (grand)children – are potential first-time buyers, and opened a Help to Buy ISA before the end of November, although, from 1 December they will no longer be available, remember that contributions can continue to existing accounts.

  • Pensions

No tax year end or pre-Budget planning would be complete without a review of pension contributions. Over the last decade the screws have been turned on pension tax relief, but it remains one of the largest drains on the Exchequer. Net income tax relief will amount to over £21bn this tax year, to which can be added £18.7bn of relief for employer national insurance contributions.

The current pension tax system is starting to create serious problems in parts of the public sector – notably among NHS consultants facing unexpected tax bills – so some Budget action is more likely this time around.

  • Inheritance tax

Last Summer’s report from the Office of Tax Simplification on inheritance tax (IHT) had been expected to feed through into the Autumn Budget. It may still do so in the forthcoming Budget, although how much will depend on the colour(s) of the governing party(ies). A radical restructuring of IHT is possible.

While potential action is awaited, you should consider using the three main annual exemptions:

  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 after that year’s exemption has been exhausted.
  2. The Small Gifts Exemption You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.
  3. The Normal Expenditure Exemption The normal expenditure exemption is potentially the most valuable of the yearly IHT exemptions and the one most likely to be reformed, regardless of Election result. Currently, any gift is exempt from IHT provided that:

a. you make it regularly;

b. it is made out of income (including ISA income); and

c. it does not reduce your standard of living.

It could also be worth making large lifetime gifts – a bumper Christmas present? – before the next Budget. There have been suggestions in some quarters of basing a reformed IHT on gifts made (or received) throughout life. At present, outright gifts made more than seven years before death generally have no IHT consequences.

  • Capital gains tax

At the time of writing (end-November), 2019 looks as if it will prove a good year for investors. Your portfolio is thus likely to show some capital gains.

The current annual exemption for capital gains is £12,000 and the maximum tax rate chargeable above that is 20% for higher and additional rate taxpayers (28% for residential property and carried interest). A change of Government could see the annual exemption fall to a nominal amount, with any excess gains fully taxed as income. Using your annual exemption now could thus save you from a substantial future tax bill, as well as providing funds for reinvestment in ISAs and/or pensions.

ACTION

The sooner you start planning ahead of that next Budget, the better. But don’t let haste encourage you to skip the advice stage which remains vital, particularly in the complex area of pensions.

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