The check list:
1. Capital Gains Tax relief
Review your investments and gains made to date. Have you made use of the £11,000 for yourself and your spouse? If not does it make sense to sell some of the investments and put them in an ISA or a pension? Or sell them and buy different investments?
2. Pensions annual allowance
Have you made use of your £40,000 annual allowance for pensions? Pensions are very tax efficient giving you tax relief at your highest marginal rate if you are self-employed or at the Corporation Tax rate of 20% if you are working in a limited company. You can also go back three years and use up unused relief up to the total of your taxable income for 2016/17. If you are over 55 you can withdraw some or all of your pension. You may want to put in a pension premium and withdraw it the next day either entirely from your tax-free allowance which is 25% of your pension fund or take it as part tax free 25% and pay tax on the remainder your pension. You should take advice before doing this as it is not always tax efficient.
You can also use your pension fund to by a commercial property, for instance your office. Rent paid to your pension fund is not taxed but gets tax relief in your business.
For spouses or children, you could consider paying £2,880 p.a. into a pension for them and they would get that topped up to £3,600 by HMRC.
- For high earners Enterprise Investment Schemes and Venture Capital Trusts which invest in small, usually high risk firms, can get you 30% tax relief. This relief works as a tax reducer so you can only get relief as far as you have tax to pay in the tax year. It may be possible to insure against the possibility of capital losses.
You can invest up to £1m in an EIS in a tax year.
- 30% income tax relief on up to £1m in an EIS in a tax year
- capital gains are tax free and you can offset any losses net of any tax relief you have had against other income or capital gains.
- Inheritance Tax relief may be available after holding the investments for 2 years.
- Capital Gains deferral relief is available for gains made in the 3 previous years or the following year.
- You must hold an EIS investment for at least 3 years.
- 30% income tax relief – this is on investments up to £200,000 per tax year and shares must be held for at least 5 years.
- Tax-free dividends
- Tax-free capital gains
4. Rent a room
This is now £7,500 p.a. tax free. Ideal to help fund a child’s mortgage by them letting out a room.
Have you used your £15,400 allowance for this year? Next year the allowance is £20,000. Funds grow income and capital gains tax free. You can now take out money and reinvest it in the same tax year without impacting on the annual allowance. The Life Time ISA, LISA starts for under 40’s from next tax year. Put in up to £4,000 p.a. and get a 25% government top up.
6. Vintage Cars
If you are an employee of a limited company, you can be paid a vintage car and not pay National Insurance and then later sell and not get taxed on any capital gain.
You could in theory buy several properties at different times and as long as you genuinely move into in each property and live there and make principal private residence elections you would get principal private residence relief on each for the time you lived there plus another 18 months. If you then rented them out you would get a further £40,000 of tax relief.
8. Retire and not pay tax on your income
This is quite achievable for £100,000 p.a. or more if you do not have rental or earned income not covered by tax allowances. So, having a buy to let portfolio for retirement may not be necessarily as good as you think compared to an investment portfolio of unit trusts and investment trusts. Insurance bonds allow a tax-free income of up to 5% p.a. for up to 20 years. See my article in Advice Matters.
For tax and investment advice contact.
Alan J Solomons BSc FCA CeFA DipPFA who is one of about 300 practising Chartered Accountants in the UK who is also a practising Independent Financial Adviser and is a director of Alpha Investments and Financial Planning Ltd 020 3397 7730 or firstname.lastname@example.org