A focus on capital gains tax may well mean a better deal.
With the new year having firmly arrived, and the end of the tax year just three months away, now is an ideal time to blow the cobwebs away and ensure your money is working as hard as possible – by getting your end-of-year tax planning in order.
Tax rules do, of course, change, and with a General Election just around the corner, making the most of current reliefs is paramount. So how can you maximise your tax efficiency before the end of the tax year, ring-fencing what you can from the taxman?
PENSIONS: TIME TO MAX UP?
Pensions are the most generous mainstream tax-efficient scheme. And there’s no time like the present: with Labour stating that it intends to reduce the level of tax relief that high earners can claim on their pension contributions, there’s no guarantee that the current relief at 40 per cent or 45 per cent will be available in years to come.
Currently, explains Jason Hollands of Tilney Bestinvest, you can achieve potential tax relief at your marginal rate of income tax on pension contributions, “meaning those who pay tax at the 45 per cent band effectively only pay a net 55p for every £1 of investment.”
Further, while annual pension contributions this tax year are effectively capped at £40,000, Hollands notes that you may be able to use up any unused allowances from the past three years, along with this year’s allowance. With preceding years capped at £50,000, that could give you a total allowance of £190,000, attracting up to £85,000 in tax relief if it all came at the 45 per cent rate.
Also remember, says Danny Cox of Hargreaves Lansdown, that non-earners can still gain 20 per cent tax relief on contributions of up to £3,600 gross each tax year. So if you’ve got a spouse who doesn’t work, consider using their allowances both this tax year and immediately in April.
“BED AND ISA”
Think of your Isa as your “use it or lose it” annual allowance, says Maike Currie of Fidelity Personal Investing. Already much enlarged, come 6 April 2015, the amount that you can shelter from the taxman each year will rise from £15,000 to £15,240. Even if you don’t have enough cash knocking around to top-up to £15,000, you could consider selling existing investments, such as shares or funds, that you own outside of tax-efficient wrappers, and then ploughing the funds back into an Isa, says Hollands – the so-called “Bed and Isa” process. Just be careful, he says, that “you don’t crystallise gains beyond your annual capital gains tax allowance” (which is £11,000 this tax year).
If you’ve used up your Isa and pension allowance, consider products where most of the profit will be taxed on capital gains (like unit trusts or shares) rather than income tax, suggests Cox. Whereas the latter’s top rate is 45 per cent, capital gains tax is 28 per cent.
For those who are already using their annual pension allowances and are happy taking higher risks, statutory-backed tax efficient investment schemes like Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) could be a good option, say Cox and Hollands. Both offer upfront tax relief of 30 per cent and tax free gains, with dividends from VCTs also tax free.
GIVE IT AWAY
Another straightforward way to keep your money out of the taxman’s hands is passing it to someone else: if you’ve got a Junior Isa for your child, remember the limit for this tax year is £4,000 (increasing to £4,080 in April). Utilising this allowance fully could go a long way in the future, says Currie. Fidelity has shown that investing £100 a month from your child’s birth could provide almost £30,000 by the time he or she reaches 18.
And when it comes to inheritance tax, ensure that you’re making the most of your exempt gift allowances, says Cox. You can give away £3,000 now, along with another £3,000 in respect of the previous year if this wasn’t used, followed by a further £3,000 on 6 April.