12 days of tax tips

With the holiday period being a good time to reflect and plan, what better way to ensure you’re informed and up to date than 12 days of tax tips from our trusted tax accountants?

Each day we will open the door to another tax-related topic – meaning you can start 2022 in the know.

This article was updated on 8 December 2021

1. Self-Assessment Return

The deadline for online filing of the 2020/2021 Self-Assessment Return is 31 January 2022. If you have not already filed your Return with HMRC then now is the time to do so. A £100 penalty applies if the Return is filed late, and late payment interest will also be due on any tax that is owed. Our accountants can help you with your self-assessment.

2. Tax planning for Pensions

Do not forget to contribute to your pension as we near the tax2. Tax year-end of 5 April 2022. Currently, the Annual Allowance is £40,000 per tax year subject to available earned income in the year (i.e. employment/self-employment income). Note that the allowance is tapered if your adjusted income is over £240,000. If you have unused relief from the prior three tax years you can also utilise this, starting with the earliest year; however, you must use the Annual Allowance in full for the current year first.

3. ISAs

Have you utilised your full ISA allowance for 2021/2022? For the current tax year, you can save a maximum of £20,000 and this can be in a cash ISA, a stock and shares ISA, a Help to Buy ISA, an Innovative Finance ISA, Lifetime ISA or any combination of each of them. You cannot carry forward unused relief so you must contribute whilst you still can. ISAs are a tax-free wrapper, so you do not have to pay income tax or CGT on the activity within them. It’s important to note that you can also inherit the ISA allowance, which means you can leverage your partner’s unused allowance for further savings. You can also withdraw your funds at any time generally, with no tax consequences, and leverage your partner’s ISA allowance for further savings. Remember to make use of the junior ISA too for children/grandchildren. For 2021/2022 the savings limit for Junior ISAs is £9,000 and can be put towards education costs or first home purchases.

4. EIS/SEIS/VCT

You can invest up to £1,000,000 in an Enterprise Investment Scheme (EIS) in both the current and previous tax years and obtain a 30% income tax credit on the amount invested and defer the assessment of capital gains made in the 3 year period prior to investment and up to 12 months after.

A similar relief applies to the Seed Enterprise Investment Scheme (SEIS); however, the income tax relief is 50%, and the CGT relief is an exemption rather than a deferral. Naturally, the investments themselves are higher in risk. The maximum amount that can be invested per annum is £100,000.

Both EIS and SEIS qualifying companies are unlisted companies. The alternative is to invest into Venture Capital Trusts (VCT), which are listed companies that are run by a fund manager and which, in turn, invest mainly in smaller companies that are not quoted on stock exchanges. Whilst there is no CGT relief on investment, you do obtain 30% income tax relief on investments up to £200,000 per year, and dividends do not attract tax.

Note that each investment can be free from CGT itself when sold, depending on the term the shares are held.

5. BPR

Investments that qualify for Business Property Relief (BPR) can be passed on free from inheritance tax upon the death of the investor, provided they were owned for at least two years at that time. You can get 100% Business Relief on a business or interest in a business and shares in an unlisted company. You can also get 50% Business Relief on shares controlling more than 50% of the voting rights in a listed company and also assets owned by the deceased and used in a business they were a partner in or controlled.

What is attractive to many is that with a BPR-qualifying investment, the shares are held in your name, which means you keep hold of your wealth. Therefore, you do not have to give away your money or assets during your lifetime to reduce the value of your estate, an option not many people feel comfortable with.

6. Transfers to your spouse/ civil partner

A reminder that transfers between spouses/civil partners occur at no gain/no loss for capital gains tax purposes. Therefore, consider whether any assets held in your sole name could be transferred to your spouse, for them to make use of any available tax-free allowances and the basic rate band. They may also have available capital losses brought forward to be utilised.

7. Capital Gains Tax

The Annual Exemption for 2021/2022 is £12,300 which means gains up to this limit are exempt from tax. The Allowance cannot be carried forward, so if you have assets which are standing at a gain it is worth considering selling some and reinvesting in order to utilise your allowance.

The capital gains tax rate of 20% (10% for basic rate taxpayers) for all assets other than residential property makes investing for capital growth attractive from a taxation perspective. The capital gains tax rate on residential properties is 28% (18% for basic rate taxpayers)

A reminder that disposals of UK residential property from 6 April 2020 (not wholly used as your main residence during your period of ownership) must be reported to HMRC within 30 days of completion and any tax due paid. Penalties and interest will apply on late filing and payment.

8. Wills

Making a will is a job that many people put off. As a consequence, approximately one-third of us die without having written a will. If you have children under 18 it is very important to have a will to name a legal guardian.

Even if your assets are not substantial and your wishes are straightforward it is still advisable to make a will, as the practicalities of dealing with the Estate are much easier if there is a valid will.

9. IHT Annual Gifts

As it is the season of goodwill you may want to make some gifts! The annual tax-free allowance is only £3,000 so you can make gifts of at least this amount each year. Any unused allowance can be carried forward for just one year.

The IHT nil rate band is £325,000 but gifts made outside the seven years prior to death are ignored. If you have substantial assets and you are concerned about IHT you may want to make large gifts and perhaps take out insurance to cover the eventuality of dying within seven years.

From 2017/2018 the nil rate band was enhanced if you have a house and are passing some of your assets to direct descendants.

The details of this relief are extremely complex. It should be borne in mind that if the value of your estate exceeds £2 million the relief is liable to reduction. Note this is the total value of the Estate before any reliefs such as BPR.

10. IHT Gifts out of Income

One of the reliefs that is often forgotten is that regular gifts out of surplus income are totally exempt from IHT. If you have surplus income, which you wish to gift, making a gift to someone at Christmas or New Year or on a regular basis is a good way to set up a pattern.

It is always a good idea to keep very good records of such gifts (including proof that they came out of surplus income) so that the relief can be claimed on death. Another example that some grandparents favour is the payment of their grandchildren’s school fees.

11. Charitable Gifts

Keeping up with the theme of giving, charitable gifts offer tax benefits.

Donating through Gift Aid means charities and community amateur sports clubs (CASCs) can claim an extra 25p for every £1 you give. It will not cost you any extra. It is a simple election that normally requires just a tick of a box when donating.

Note that if you do not pay enough income tax in a year, there may be a clawback of the gift aid relief via your Tax Return. Therefore, in the case of spouses and civil partners, where one is a higher rate taxpayer and the other is a basic rate taxpayer, it is recommended that the claim is made by the higher rate payer.

12. Leaving the UK

If you are considering emigrating, for whatever reason, do not assume that you will immediately become not liable to UK tax.

There are statutory rules which determine your residence status. Also note that non-residents are now liable to tax on UK residential property and that any gains realised whilst overseas become chargeable to UK tax if you return to the UK within 5 years, as do any dividends paid by a UK close company (controlled by 5 people or less).