This time of year is always a busy one for financial advisers. As the dawn of the new tax year approaches on 6th April, clients will often want to make the most of their allowances and investments within the current financial year. This year more than ever there are a number of changes on the way that will particularly affect our clients. Below, we outline some of these and what you might wish to consider acting upon in the coming weeks.
• Maximise ISA allowances – Eligible individuals can contribute £15,240 into an ISA wrapper this tax year. ISA allowances allow individuals to build wealth in a tax efficient environment over time. Many investors who have maximised allowances annually benefit from a substantial tax free income stream and the ability to shelter large capital gains. In recent years the government has made ISAs even more flexible.
Effective from 3 December 2014, if an ISA holder dies, they will be able to pass on their ISA benefits to their spouse or civil partner via an additional ISA allowance.
AIM stocks are now permissible investments which may provide some with significant inheritance tax benefits.
Further still, there is no limit on how much of the allowance can be allocated to cash and investors can switch from investments to cash and vice versa without restriction.
Allowances cannot be carried forward to future years therefore an allowance left unused is an allowance lost.
• Utilise Capital Gains Tax (CGT) allowances – Possibly the most underutilised personal allowance available is the annual exempt amount which allows individuals to make capital gains of £11,100 per annum without being subject to capital gains tax. Taking gains within this allowance can be used to help meet client’s income requirements tax efficiently. Like ISA allowances, capital gains tax allowances cannot be carried forward.
• Review how you structure remuneration as a Director – Using pension contributions in combination with salary and dividends can prove to be an extremely tax efficient way to fund your remuneration package and is often of particular advantage to those over age 55 who can access their pension fund with immediate effect should they wish to do so. Pension contributions also provide an opportunity to extract value from your business over time and help to reduce your exposure to creditor and business risk.
• Consider how recent pension changes may affect your planning – Going forward many higher earners will have a significantly reduced annual pension allowance. For some it may be as little as £10,000 per annum. Further still the lifetime allowance is set to fall further next tax year. This will cap the amount an individual can build up tax efficiently in a pension to £1,000,000. Opportunities to maximise and protect your allowances do exist; particularly if action is taken before the 6th April 2016. However, for those that do exceed these allowances tax charges may apply. If you think you might be affected you should seek professional advice prior to 16th March 2016, the date many expect higher rate tax relief to be withdrawn. Please refer to our previous article on high earners and the tapered annual pension allowance.
• Regain your personal allowance – The personal allowance – currently £10,600 for this tax year – is a valuable allowance for all tax payers. However the allowance is reduced by £1 for every £2 of income received in excess of £100,000. Someone with income of £121,200 will lose their personal allowance completely, creating an effective tax charge of 60%. What many do not realise is that the definition of ‘income’ for this purpose encompasses a number of income sources, and a number of taxable employment benefits. For those that are affected, a personal pension contribution equal to the excess amount will enable them to retain their personal allowance.
• Consider how you might pass wealth down to future generations – Whilst Inheritance Tax rules are set to change with the introduction of a main residence allowance in 2017/2018, there will still be a number of estates that will have to fund large inheritance tax liabilities. This is particularly problematic for estates that are in excess of £2,000,000 where the main residence relief will be, at best, reduced, and at worst, simply won’t apply. There are a number of ways to help reduce or manage inheritance tax liability whilst balancing access to capital during lifetime and control.
When making any changes to your investment portfolio, it is important to consider what you want to achieve personally and financially over the short, medium and long term and review how well placed your current pension and investments are to deliver these objectives.
For any help or further advice in relation to financial planning or investments, please call us on 0161 973 9150 or contact us here.
The Financial Conduct Authority does not regulate Tax or Estate Planning.