Personal taxation

Tax is one of the biggest costs incurred by individuals and it is therefore worth their time and expense to keep the amount paid to a minimum wherever possible. The Government’s aim is to tax a w...

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...ll involve risks, for example, investing in unlisted securities or being challenged by HMRC. Individuals need to be fully aware of all the potential consequences before definite strategies are adopted.

 

Any tax planning activity involves the use of a number of strategies, which for all individuals should firstly be to ensure that they use their available allowances and reliefs in full each year. Those individuals now affected by the additional rate of income tax, should attempt to reduce their income below the level affected and for those affected by the changes to the personal allowances should make attempts to reduce income below the threshold. Individuals who remain in the higher rate tax bracket but suffer a reduction in the personal allowance should also consider strategies to mitigate the effects of an effective increased tax rate on that tranche of their income.

How the income is actually reduced will depend on their individual circumstances and the types of income and assets they have. For example, for those affected by the additional rate of income tax, it may be a consideration to defer ...

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...ow a set procedure in conjunction with the Advisory Panel, giving an independent view, to ensure that taxpayers are given the chance to explain why, in their view, GAAR should not apply.  Before a tax charge can be imposed the Advisory Panel will consider the matter and decide if the application of GAAR is a reasonable course of action.

Where tax advantages arise from abusive tax arrangements, they will be counteracted by reasonable adjustments to the tax or taxes in question.

Anyone who has used a tax avoidance scheme can be served with an accelerated payments notice (APN) from HMRC, before the success or failure of the scheme has been established. Such a notice requires the individual to make a payment of the tax due in advance within 90 days of receipt of the notice.

What is the first thing that all individuals should consider in any tax planning strategy?

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Income tax planning strategies will differ depending on individual circumstances.

Couples and partners

Married couples or those in civil partnerships may find that one pays tax at a higher level than the other, or that one does not have sufficient income to fully utilise their personal allowance.

There are a number of ways in which income can be transferred between spouses or partners and, unless otherwise stated, these strategies may also be applicable for those living together but not married or in a civil partnership. The important factor that must be remembered in any such transfers is that they must be absolute, meaning that the transferor is totally giving up any future benefit from the income. As this may give rise to later consequences, if there is a divorce, many individuals will be unhappy to do this. Care must also be taken with any absolute transfer as tax rules can change and outweigh any potential tax saving.

Investment and savings income

Where the income is investment income, the ownership of the actual asset could be transferred. However, if the parties involved are not married or in a civil partnership there could be a liability for capital gains tax or inheritance tax. Nevertheless, if an asset is transferred and a subsequent sale involves CGT being paid at the lower rate, a tax saving can be made.

Tax on savings income could be saved by holding the accounts in joint names. As each party is normally taxed on half the income, or their declared share, this not only saves tax but also allows income producing assets to be transferred without losing complete control.

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...ies and partnerships are subject to special rules which generally mean that they cannot save tax by paying dividends or employing a partner.

The taxable benefit from the use of a company car and for any fuel provided is normally charged only on the period for which it is available for use. This gives an immediate tax liability, even if only used for a short period of time. It may therefore be worth considering whether this benefit is actually worthwhile. Cars with a low CO2 emission level of 50/km or less will qualify for a 100% capital allowance.

Self-employed people

The choice of accounting date can make a big difference to when tax actually has to be paid. Changing the accounting date can also allow overlap relief from earlier years to be used. The date of retirement can also make a difference to the tax liability in the final year of business.

From 2024/25, with a transition period over 2023/24, the current basis period rules will change to a tax year basis, meaning that profits will be taxed in the tax year, regardless of the business’s accounting date. During the transition year, any unused overlap profits will be set off in that year.

Although overall tax may be saved by changing the business status to a limited company, the decision must also be based on other factors such as, for example, the additional costs of administration in a limited company.

What benefit is there in paying a spouse or partner who works in a business a salary above the lower earnings limit but below the primary and secondary contribution thresholds for NICs?

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National Insurance contributions are generally paid by everyone over age 16 who is employed, self-employed or an employer, up to the end of the year in which the individual reaches state retirement age. Their payment builds up an entitlement to a range of state benefits.

Taking dividends from a company instead of salary (where p...

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...increase the state pension age to 67 between 2026 and 2028 and a recommendation has been made to increase it again to 68 from 2037. The Pensions Act 2014 provides for a review of the State Pension Age every 6 years.

Why would taking dividends instead of a salary avoid a liability for NICs?

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For those under age 75 pension planning is an important tax planning strategy, while for those over age 75 planning is also needed to maximise the benefits of the existing funds.

Any pension contribution attracts relief, and the contributions benefit from tax advantageous growth within the fund and a tax-free lump sum / pension commencement lump sum can be taken at retirement. Where an individual makes contributions net of tax, the grossed up rate should not exceed the income that ...

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...pacting on the tax-saving benefits. Also, if contributions are left until later in life it will be necessary to invest more to achieve a fund sufficient to produce an adequate income in retirement. If the individual cannot afford to make this level of contribution, they may not have the comfortable retirement they desire.

In respect of maximising contributions, explain the benefit that comes from pension contributions being made by employers.

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The main aim in estate planning is to leave your affairs in an organised manner on death and although this may involve elements of tax planning there are also other issues to be considered.

Wills

Many people do not make wills and those who do frequently overlook the need to keep them under review. It is recommended that wills are reviewed at least every two years and more frequently if there are legislative changes affecting  the IHT rules. If a will has not been written in the most tax-efficient manner, it is possible for the beneficiaries to execute a deed of variation within two years, though this may still not be fully efficient in relation to all taxes.

Inheritance tax planning

The potential impact of inheritance tax is likely to become a higher priority as individual's age, but the earlier the planning starts the greater chance there is of reducing the tax liability. A general approach should include using all reliefs and exemptions that are available and taking into account the impact of other taxes.

However, before specific strategies are adopted it is essential to ensure that sufficient income and capital remains for the expected remainder of life. Making gifts can then be considered as well as the following strategies.

S haring assets between spouses/civil partners

In general terms, there is no CGT or IHT on transfers of assets between spouses/civil partners, so the sharing of assets can be beneficial. Now that any unused nil rate band can also be transferred, there is less need for ensuring that each partner has sufficient assets to fully utilise their own nil rate band, as any excess is not wasted.

Nevertheless, there is still a benefit in fully utilising the nil rate band on the first death, particularly where the assets being transferred away from the spouse/civil partner are expected to grow in value in excess of the increases in the nil rate band. However, it is also important to ensure that the surviving spouse/civil partner is not being left in tax-efficient poverty. Discretionary trusts can also be used to utilise the nil rate band on first death and, despite the complexities of the tax returns system, these provide a large degree of flexibility in managing an individual’s affairs after their death.

Where a surviving spouse or civil partner is not UK domi...

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...nnual premiums into a pension for a spouse or child or to make an annual contribution to a child trust fund or Junior ISA.

IHT and trusts

Trusts are frequently used in IHT planning activities. Their advantages include the following:

They can provide cash when an estate is tied up during probate

The settlor can also be a trustee, allowing an element of retained control of the gift

Family wealth can be protected from the effects of divorce or creditors or relatively young and immature potential beneficiaries

The three main types of trust used in IHT planning are:

Bare (absolute)

Interest in possession

Discretionary

Accumulation and maintenance trusts can no longer be created with their pre-22 March 2006 tax benefits, so discretionary trusts are the main alternative.

Where wills create an interest in possession or accumulation and maintenance trust they should be reviewed, as it may be necessary to change the trust to avoid it becoming liable for periodic and exit charges. Existing wills may also create ‘nil rate band discretionary will trusts’, which are no longer as important now that any unused nil rate band can be transferred to a surviving spouse/civil partner.

For lifetime gifts the basic strategy is now to:

Make gifts into discretionary trusts within the available amount of the nil rate band at seven-yearly intervals. The aim should be to ensure that the value of the assets under the trust does not exceed the nil rate band at the time of the ten year anniversaries, to avoid the periodic and exit charges. Even if the assets do exceed the nil rate band, a charge of 6% should not be too excessive

Make outright gifts or gifts into a bare trust so that the donor has used their nil rate band

It should be noted that if part or all of the nil rate band is used up in lifetime and is not effectively reinstated by the passing of seven years, the relevant percentage will not be available for the surviving spouse/civil partner to use on their subsequent death.

Where 10% or more of an estate is left to charity, a reduced rate of IHT will apply.

Explain how assets can be transferred to a spouse or partner who is not UK domiciled for IHT purposes, in order ito avoid the restriction on the amount that can be transferred tax-free on death?

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Although covered in previous chapters, there are a number of points for consideration in relation to taxation in the financial affairs of individuals and trusts.

Gifts

Most gifts of investments will not qualify for holdover relief, so CGT could be payable without the benefit of any proceeds to pay it with. Holdover relief may be available where the gift consists of shares in the donor’s personal company or a furnished holiday letting and also for gifts chargeable to IHT. Where entrepreneur’s relief is available, it may not be beneficial to claim holdover relief as it only defers a gain and the entrepreneur’s relief may not be available when they dispose of the gifted asset.

Minimising CGT

There are a num...

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...be gifted. An ISA encashment will be completely tax-free and the cash gifted with no CGT implications. Withdrawals from a pension in excess of the 25% tax-free lump sum will be subject to income tax at the investor’s marginal rate, although the subsequent gift will have no CGT implications.

Charitable gifts

Gifts to charity are exempt from both CGT and IHT and where at least 10% of an estate is gifted to charity, a reduced rate of IHT applies to the remaining estate. Where certain assets are gifted to charity, the individual will benefit from income tax relief on the full market value of the gifts.

How can an ISA be used to create a ‘bed and breakfasting’ type benefit?

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AI is now being used by tax authorities to identify tax fraud, while companies are using it to ensure they remain compliant with changing regulations and predict future income streams and tax liabilities. ...

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...l adviser but is being used to improve the quality of advice being provided by modelling potential recommendations.

How is AI being used by exchange-traded funds?

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Chapter revision test. Your results and 7.6 hours of estimated study time will be added to your CPD certificate on completion. If you retake the test then additional CPD time for the test will be added.

Drag the correct strategy to the correct tax planning area.