Mat Scott, partner and Susan Smyth, director of KPMG Belfast’s Private Client team look ahead to the end of tax year 5 April 2020 and consider matters that UK taxpayers should review as part of preparing for the end of another tax year.
These include reminders of tax reliefs potentially available to taxpayers and which may expire if not availed of before the end of the tax year.
Although limits for pension contributions have reduced in recent years, reviewing if you have availed of permitted pensions tax reliefs still makes sense when looking ahead to retirement.
The annual allowance limit for pension contributions is £40,000 for 2019/20. In estimating the amount of eligible pensions relief in 2019/20, it also makes sense to review the level of prior years’ contributions. In many circumstances, an unused annual allowance carried forward from the three previous tax years can also be used in 2019/20.
Mat and Susan advise that care should be taken in applying the pension allowance limits as exceeding the annual allowance of £40,000 can result in a clawback charge. A tapered allowance, which is lower than the standard annual allowance, applies to high income individuals with income in excess of £110,000.
IHT is a complex and evolving area and taking advice regularly on tax issues arising upon inheritance tax events is strongly recommended. Standard housekeeping such as making sure that the provisions in your will are reviewed and up to date remains important as does considering whether you have appropriate life assurance cover in place.
One relief to remember when reviewing your plans for transferring assets to others is the small gifts exemption which is capped by reference to an annual limit. Gifts of up to £3,000 per tax year can be made free of IHT. This limit is increased to £6,000 if the previous year’s annual exemption was not used.
The finance cost restriction applied to taxing income of individuals from residential property businesses is being further phased in during 2019/20. The restriction results in 25% of the total finance costs being allowable as a deduction against rental income and the balance available as a basic rate tax reduction.
Mat and Susan advise that individuals with buy-to-let properties may need to review their pre-tax and post-tax position and consider the impact of this restriction on the level of UK tax liabilities arising from property rental income in future years.
When you review your readiness for the upcoming tax year end and look ahead to future years, remember to think about the position of your family and the annual levels of taxable income and capital gains arising to individual family members.
Mat and Susan suggest:
When reviewing the position of a family’s personal and business assets and income and gains arising from these assets, remember to take into account the rate of tax applicable to different income levels as well as the entitlement of individual family members to different allowances and reliefs - some of which are available each tax year.
In the tax year 2019/20, the personal allowance is £12,500 and the basic rate band is £37,500. Including the personal allowance, the threshold at which taxpayers start paying higher rate tax is £50,000 for 2019/20. Additional rate tax is payable on taxable income above £150,000 for all UK residents. (Please note that with certain taxing powers devolved, different tax rates may apply across the UK).
An individual’s personal allowance is reduced where total income for the tax year is over £100,000, by £1 for every £2 of income above this limit. If your pattern of income earnings is potentially ‘lumpy’ across a tax year, remember to think about the cumulative income earned in each tax year when estimating the level of personal allowance available to you for the year.
In certain circumstances, an individual can transfer part of their personal allowances to their spouse/civil partner. The marriage allowance of £1,250 for 2019/20 can be transferred, but only where neither party pays tax at higher rate. This may result in tax savings up to £250 in the tax year. To action, a specific claim must be submitted to HMRC.
The savings allowance entitles you to a certain amount of tax-free savings income each year such as bank and building society interest. In 2019/20, this amount is up to £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. This allowance is not available for additional rate taxpayers.
The dividend allowance entitles you to earn £2,000 of dividend income tax free in the 2019/20 tax year. The first £2,000 of dividend income is charged to tax at 0% and thereafter basic rate taxpayers pay tax at 7.5%, higher rate taxpayers at 32.5% and additional rate taxpayers at 38.1%.
Returns on savings held within an ISA are free of income tax and capital gains tax. The maximum you can save is £20,000 in 2019/20. ISA limits cannot be carried forward so if you or a member of your family are planning to invest in the 2019/20 tax year, ISA investments must be made by 5 April 2020.
Charitable donations under the Gift Aid scheme can generate benefits for both the donor and the charity. The tax saving will be greater for a higher rate taxpayer than for an individual taxed at the lower rate.
Tax relief against the 2019/20 income is possible for charitable donations made between 6 April 2020 and 31 January 2021, providing the donation is made before filing the 2019/20 tax return.
Care should be taken when making charitable donations if you are a low earner. An unexpected tax charge may arise if your donation falls within the level of income which could be offset by your personal allowance.
When considering adjusting the mix of assets and income from assets arising to individual family members, assets can usually be transferred at any time between spouses/civil partners tax free.
However, the annual capital gains exemption of £12,000 which permits you to realise tax free capital gains up to this amount is capped for the tax year and expires if not used by 5 April 2020.
Mat and Susan up their advice as we look ahead to the end of another tax year by suggesting that “Acting now may give you and family members the opportunity to benefit from unused reliefs and allowances remaining for this year as well as planning for the future”.
If you would like to discuss matters of interest in this article, please contact a member of KPMG’s Private Client team.