Budget reprieve: Use reliefs while they are still available
An overview of the valuable reliefs available – for now
The UK political climate remains volatile. As we start the new tax year, it is more important than ever for investors to make the most of existing tax allowances while they still can. As things stand, tax relief on pensions, capital gains, inheritance and for entrepreneurs remain generous, but at a time of weakening economic growth, they are under threat.
A change of government, a ‘No Deal’ Brexit or even a Brexit resolution could all prompt a new Budget, with changes to the tax rules. Ami Jack, National Tax Director at Smith & Williamson warns that a poor Brexit outcome “may require tougher measures with ‘fiscal buffers’ maintained to provide support for the economy.”
Below is an overview of the valuable reliefs available - for now:
Even though people do not choose when they die, they can make the most of their gift allowances. There could be significant benefits if wealth can be passed on to the next generation while a person is still alive.
- They can give away £3,000 worth of gifts each tax year (the limit applies to each individual, not to each gift). They can also carry any unused annual exemption forward to the next year.
- They can make regular small gifts out of income, if they can show that giving the gifts left enough for their usual standard of day-to-day living.
- They can give limited gifts on celebration of marriage. Gifts to charities and political parties also fall outside the IHT net.
- They can make ‘potentially exempt transfers’. There’s no limit on the value of a potentially exempt transfer but, if they die within seven years or retain use of an asset (such as a family home), IHT could still be due.
Pensions tax reliefs
In spite of much speculation that the Chancellor would abandon higher rate tax relief, for now, it remains in place. However, it remains an open target in future Budgets for balancing the books.
Broadly, investors can currently contribute up to 100% of their earnings to £40,000 and get tax relief. This reduces progressively to £10,000 for those earning between £150,000 and £210,000. Non-earners can contribute up to £3,600.
Carry forward: if a pension saver hasn’t used their full annual allowance in previous years, they may be able to carry it forward for up to three years and use it in the current tax year. This can be a way for higher earners to get more into their pensions.
Either way, where possible, individuals should maximise their pension contributions while they still can. The 40% or 45% tax relief remains a valuable benefit and a compelling way to boost a long-term pension pot.
Capital Gains Tax
The rate of Capital Gains Tax (CGT) is low, relative to historic rates. Investors currently receive an annual allowance of £11,700 rising to 12,000 in April 2019 and then pay tax at between 10% and 28% on any gain depending on the asset (the highest rates are for residential property).
CGT rates have varied considerably over time and could be vulnerable in the future. Investors sitting on assets showing considerable gains may want to consider selective disposals while rates remain relatively low.
Entrepreneurs’ relief reduces the amount of CGT paid when businesses are sold. Entrepreneurs pay tax at 10% on gains of up to £10 million.
There were changes to the conditions to qualify for this relief in the Budget. The new conditions require anyone claiming the relief to be beneficially entitled to at least:
- 5% of the company’s distributable profits; and
- 5% of its assets available for distribution to equity holders in a winding up.
The qualifying period over which conditions must be met was extended from 12 months to two years. However, the relief remains largely intact. Entrepreneurs considering a sale should take note.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.