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Year End Tax Planning Guide 2020/21: Part 1

As we approach the end of the tax year, now is the time to review your tax affairs to ensure that you have taken advantage of all reliefs available to you and have considered some planning opportunities to help reduce your tax bill.

Our national tax team have worked together to create a handy Year End Tax Planning Guide to give essential tax planning advice for individuals, corporates and SMEs.

Our two-part blog will cover some of the key topics you might find useful when it comes to getting your taxes in order for the coming year. This blog covers:

  • Income Tax
  • Capital Gains Tax
  • Tax Favoured Investments
  • Property Investment Business

Income Tax

For 2020/21, the tax-free personal allowance is £12,500 and the next £37,500 is taxed at the basic rate of 20% (7.5% for dividend income). Higher rate tax of 40% (32.5% for dividends) is charged on income above £50,000 and additional rate tax of 45% (38.1% for dividends) is charged on income above £150,000.

The personal allowance is reduced by £1 for every £2 of income above £100,000.

Note that dividends are treated as the top slice of income, so the basic and higher rates are first allocated against other income.

Action point: Transferring income yielding assets, or an interest in those assets, to a spouse or civil partner ensures both parties have income to use up relevant allowances. Take advice before doing this as there may be other tax implications.

Capital Gains Tax

The annual exemption for 2020/21 is £12,300. This is a ‘use it or lose it’ exemption; it cannot be carried forward to the future years. It therefore makes sense to crystalise gains each year to the extent of the annual allowance, if possible.

Rates of Tax

The rate of capital gains tax (CGT) is 10%, where the total taxable gains and income is less than £37,500. Any excess gains are taxed at 20%. Where business asset disposal relief (BADR, formerly known as entrepreneurs’ relief or ER) applies, the rate of tax on the whole gain is 10% subject to a £1m lifetime allowance (see below).

Business Asset Disposal Relief

Prior to 6 April 2020, BADR was known as entrepreneurs’ relief. CGT is charged at 10% where BADR applies, subject to a lifetime limit of gains totalling £1m. This was reduced from the £10m limit that applied to disposals made prior to 11 March 2020.

Crystalise and use capital losses

Capital losses must be offset against capital gains in the same year. Unused losses are carried forward indefinitely and can then be offset against future gains. When an asset has become valueless or worth next to nothing, it may be possible to make a “negligible value claim” in order to crystallise a capital loss.

Action point: If you own more than one home, consider whether a principal private residence election is needed. You have two years to make an election so the sooner you speak with us, the better the position we will be in to advise on which property the election should be made over.

Tax Favoured Investments

Utilise individual savings accounts

Individual Savings Accounts (ISAs) are an excellent investment for higher rate taxpayers. The maximum allowance is £20,000. You must save or invest by 5 April for it to count for that year and if you don’t use the allowance it is lost.

The ISA family has grown considerably since its inauguration in 1999, with a further five ISAs to consider:

  • Help to buy ISA
  • Inheritance ISA
  • Lifetime ISA (LISA)
  • Flexible ISA
  • Innovative Finance ISA
Enterprise investment schemes and EIS shares

Tax relief is available where you subscribe for shares qualifying for Enterprise Investment Schemes (EIS) or Seed EIS (SEIS) relief.

Under the EIS scheme, your tax liability for the year may be reduced by up to 30% of the sum invested. In addition, capital gains from disposals in the previous 36 months or following 12 months may be reinvested into EIS shares, resulting in a deferral of the gain.

Income tax relief is given at the rate of 50% of the sum invested, and relief may be given against tax in 2019/20 or 2020/21.

Venture Capital Trusts

Venture Capital Trusts (VCT) are specialist tax incentivised investments that enable individuals to invest indirectly in a range of small higher risk trading companies and securities.

Up front income tax relief at 30% of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief.

Family Investment Companies

Family Investment Companies (FIC) can be a useful way to protect family wealth. The most appropriate structure will depend on the family’s circumstances and objectives. A FIC enables parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.

Gains in a FIC are taxed at 19%, compared to most individuals and trustees who pay up to 28%. Any investment gains and income could be paid into a pension plan for the benefit of the shareholders.

Action Point: Prudent utilisation of the reliefs associated with tax favoured investments as part of a balanced portfolio can make a big difference to future investments’ returns. But it is important to consider the risks associated with them and it is essential that professional advice is sought.

Property Investment Business

Tax relief for mortgage/loan interest for residential buy-to-let investor

Since 6 April 2020, a higher or additional rate taxpayer will only be able to claim relief for any residential buy-to-let (RBTL) interest at the basic rate. The way that this restriction operates means that a taxpayer’s total income will no longer include a deduction for the restricted interest.

Annual tax on enveloped dwellings

Annual tax on enveloped dwellings (ATED) can apply when residential property with a value of at least £500,000 is held in an ‘envelope’. Broadly, an envelope includes a limited company, an LLP with a corporate partner or a collective investment scheme.

For any properties owned at 6 April 2021, unless the ‘envelope’ is a charity, a return will need to be filed by 30 April 2021 and any tax accounted for. In the case of a mid-year acquisition, a separate return must be filed within 30 days of purchase.

Structure and building allowances

A new tax relief is available for businesses (including property rental businesses) that incur capital expenditure on the construction or improvement of non-residential buildings and structures. The relief known as structure and buildings allowances (SBA) will apply at an annual rate of 2% on a straight-line basis once the property has been brought into use for up to 50 years.

CGT 30-day reporting and payment regime

Since 6 April 2020 individuals, trustees and personal representatives (but not companies) who realise a taxable capital gain from the sale or other disposal of UK residential property have to make a residential property return and a payment on account of CGT within 30 days of the completion of the disposal.

Action point: Investors in commercial property should consider the allowance available and read the guidance published by HMRC. Property investors should consider whether action is required now to make use of the current tax rates and reliefs.

Read the full guide

In part two next week, we’ll be looking at the following areas:

If you have any queries about how any of the above may impact you or your business please get in touch with a member of our tax team on 01903 234094.

The purpose of this guide is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice. The value of investments can go down as well as up and you may not get back the full amount you invested.