Tax Year End Planning (Part One)
To understand and be able to put into practice , in relation to Tax Year End Planning
- Key ways to reduce income tax
- Key ways to reduce capital gains tax
- What the future might hold for the taxation of capital gains
As we approach the end of the current calendar year (and what a year it has been so far!) as well as considering essential tax planning for the current tax year, it's important to put in place strategies to minimise tax throughout the next tax year taking full account of the changes announced in the recent Autumn Statement. While you can make some really important tax savings through year end tax planning, it’s important to remember that the majority of planning strategies have greatest effect if implemented before a tax year begins, so that they have the whole of the tax year to “do their work”. So, as well as 2022/23 tax year savings that might be possible, action in this tax year could well enable individuals to be “set fair” for 2023/24.
Our tax year end planning checklist will be published in two parts and will cover the main planning opportunities available to UK resident individuals. We hope and trust that it will help to inspire action to reduce tax for the 2022/23 tax year and to plan ahead for 2023/24.
Before looking at the tax planning specifics though its important, we think, to remind that, while tax planning is an important part of financial planning, it is not the only part. It is essential that any tax planning strategy that is being considered also makes commercial sense. The tax tail should not be allowed to wag the dog, so to speak.
In this “Part One” we are going to consider income tax and capital gains tax planning. We will look at tax efficient investments, inheritance tax and year end pensions planning in Part Two.
Here are a few potential opportunities to be more income tax efficient that might be worth considering:
Reduce taxable income below £150,000 to avoid 45% tax in the current tax year. You will need to move down to £125,140 in tax years 2023/24 onwards. Pension contributions are one of the few ways to reduce taxable income.
For married couples and civil partners, ensure each has sufficient income to use their personal allowance: £12,570 in 2022/23. This will remain at that level until 5 April 2028, following the Autumn Statement. This works best if implemented early in the tax year unless you have control over “last minute” income flow, e.g. by making “last minute” bonus or dividend payments from an “owner managed” company.
- The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000. If income is above £100,000, then individual pension contributions before 6 April 2023 can reduce income to £100,000 to restore all or part of a 2022/23 personal allowance which would otherwise be lost.
- Reinvest in tax free investments, such as ISAs, to replace taxable income and gains with tax free income and gains, or investment bonds that can deliver valuable tax deferment. This strategy works best if implemented early in the tax year.
- Investments delivering tax free, or potentially tax free, and/or tax deferred, income, can be beneficial for an individual in contrast to an income producing investment which might otherwise result in an erosion of personal allowances. Note that once an investment bond gain is triggered, for example, by encashment, it is included in an individual's income without top slicing when assessing entitlement to the personal allowance.
- Redistribute investment capital between spouses/civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond. Once again though, this strategy works best when put in place at the beginning of the tax year.
Any transfer between spouses must be carried out on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.
Capital gains tax
The term “capital gains tax planning”, in the context of tax year end planning, means the taking of action ahead of, or at the time of, the disposal of an asset to eliminate or reduce a current or future liability to capital gains tax. This may involve one or more of the following:
- timing of the transaction, e.g. bringing the transaction forward or delaying it;
- ensuring that full advantage is taken of all available exemptions and reliefs;
- depending on the personal objectives of the taxpayer, prior transactions such as a transfer to a spouse/civil partner or the use of a trust;
- importantly, using the annual exempt amount;
- making full use of any available losses;
- maximising use of this year’s annual exemption (currently £12,300). Any amount unused cannot be carried forward – “use it or lose it”. In tax year 2023/24, the annual CGT exemption will be £6,000 and £3,000 in 2024/25;
- deferring the payment of tax for a year, by making a disposal after 5 April 2023;
- using two annual exemptions in quick succession, by making one disposal before 6 April 2023, and another after 5 April 2024; and
- trying to ensure each spouse/civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses/civil partners to facilitate this.
Any such transfer must be outright and unconditional. In transactions which involve the transfer of an asset showing a loss to a spouse/civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss).
It should also be borne in mind that a return in respect of the disposal of a residential property (e.g. a buy-to-let property) has to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account has to be made at the same time, if the completion date was between 6 April 2020 and 26 October 2021; 60 days for disposals completed on or after 27 October 2021 – please see HMRC’s guidance.
In July 2020, the then Chancellor (now the PM!) asked the Office of Tax Simplification (OTS), to carry out a review of capital gains tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. Based on the first report published by the OTS on 11 November 2020, it was thought that the Government might look to introduce proposals, such as taxing capital gains at the same rates as income and reducing the annual exempt amount. However, no such announcements were made in the March 2021 Budget. Instead, the Government announced that the annual capital gains tax exemption would be frozen at £12,300 until 5 April 2026. And, on 30 November 2021, the Treasury issued the Government’s formal final response to the OTS reports, as part of the publication of its ‘Tax administration and maintenance’ package. It did not accept any of the tax changes suggested by the OTS in its first report, saying: “…these reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC”. It added that “The Government will continue to keep the tax system under constant review to ensure it is simple and efficient”. The Treasury did, however, accept five of the 14 OTS recommendations in the second OTS report, which dealt with practical and administrative issues. In addition, in the recent Autumn Statement, it seems to have recognised the OTS “misgivings” in relation to the level of the annual exemption in the reduction of the annual exemptions.