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TW Ed with a timely reminder of some essential tax planning points before the end of the current tax year.

Introduction

The current (2014/15) tax year ends on Sunday 5 April. I am not sure how many of these you will be able to do at the weekend so Friday may be a better deadline to work to. As always, direct advice should be sought from a suitably qualified adviser, before undertaking any of the following.

1. Pension Contributions / Gift Aid

For those skirting around the £100,000 of “adjusted net income” mark, and therefore about to lose their tax-free Personal Allowance with an effective tax rate of 60% or thereabouts, it is worth bearing in mind that pension contributions reduce one’s adjusted net income by £1 for every 80pence personally paid in contributions.

A similar problem arises for those with Child Benefit around the £50,000 income level, since they (whoever is the higher earner in a couple, where one of the couple is in receipt of Child Benefit) suffer a clawback of Child Benefit where “adjusted net income” exceeds £50,000 on a sliding scale to 100% clawback at £60,000. Here again, an additional pension contribution can be a very tax-efficient means of getting back down below the relevant threshold and significantly reducing effective tax costs.

For those about to receive a bonus before the end of the tax year, it may well be worth taking some or all of the additional funds as an employer pension contribution – tax-deductible for the employer, tax-free for the employee – although care is still needed to ensure the Pensions Annual Allowance, etc., is not exceeded.

Anyone hoping simply to defer income to the following tax year in order to avoid tripping over these limits should take advice beforehand: income may be taxable before it is physically received, whether salary, bonus or trading income. Directors are particularly susceptible, thanks to special rules.  

Gift Aid contributions have a similar effect to pension contributions when it comes to reducing one’s adjusted net income, although there is no long term investment return with a Gift Aid payment. Nevertheless, roughly half of the cost of the payment can be recovered in tax savings, for someone whose income is such that they are starting to lose their Personal Allowance.

2. Capital Gains and Losses

There is so much emphasis on Income Tax efficiency, it is easy to forget that there is a quite generous CGT Annual Exemption available as well. The ‘new’ share identification rules mean that people have fallen out of the habit of “bed and breakfasting” shares but, once the sun has set on 2014/15, that Annual Exemption is basically gone for good. There is of course always the risk of the tax tail wagging the investment dog when it comes to CGT and making sure that the Annual Exemption is used. All other things being equal, however:

• You can make up to £11,000 of gain in 2014/15, tax-free. Each spouse has his or her own Annual Exemption.
• Current year losses are set against current year gains, regardless of how much Annual Exemption is left. If someone makes £15,000 in gains and £6,000 in losses, then they have just wasted £2,000 of their losses. Assuming the share price is broadly static, it may be better to shunt some of the losses into 2015/16 by selling part of that holding after 5^th April.
• Where gains already made are fully covered by the Annual Exemption, it may be better to hold off selling the loss-making shares until 2015/16, to make sure that they are not wasted. Once made, capital losses carried forward to a later tax year are never wasted against Annual Exemption: they are used only when the Annual Exemption in that year is insufficient.  There is an argument for selling loss-making shares all in one year, and realising gains the year after, so that all of the losses are preserved. But this will very much depend on share prices and how they fluctuate over time.
• Remember that losses must be claimed in order to be “banked” under Self Assessment.
• The new rules for non-residents mean that Principal Private Residence nominations are particularly in vogue

3. Capital Allowances / Annual Investment Allowance

The Annual Investment Allowance currently stands at £500,000 per year, but that is set to fall at the end of the coming December. Originally set to fall back down to the “default” £25,000, the Chancellor acknowledged in his 2015 Budget Speech that, for many businesses, that was simply not enough. He has not yet decided what the new level will be but it is worth bearing in mind that a high AIA limit is supposed to be very expensive for the Treasury.

The reason why this is potentially relevant now, is that many businesses run to a 31 March year-end. As a result, the reduction in AIA – to whatever level it ends up – will take place in their next period of account. The current accounting period is likely to be the only one in which the full £500,000 is potentially accessible, and the next period may suffer a significant curtailment in the threshold.

Many businesses will feel that the current limit gives abundant headroom, and will not be intending to spend anything like that on discrete plant, machinery, vans, etc. One thing to bear in mind, however, is that any substantial commercial property purchase may well also have a significant Capital Allowances claim attached; if you are in the process of buying a commercial property, the timing of the purchase could be important, in light of the forecast reduction in AIA. (As if buying commercial property were not already horrendously complex, thanks to the new rules introduced in 2012 – 2014).  

4. Inheritance Tax - Gifts

I shall pay no more than lip service to the notion of the £3,000 annual exemption for gifts: it is a ridiculously small amount which hasn’t been increased since the Inheritance Tax Act 1984 was originally drafted. For many, its current-day value is dwarfed by the scope of the “gifts out of income” exemption at IHTA 1984 s 21. The fact that it can be rolled up into the next following year makes little difference, in my view: it sees more daylight as an exam question than as a serious part of modern IHT planning.

5. Overpayment Relief

More familiar to some as “error or mistake relief”, where the taxpayer is in a position to make a claim in relation to an earlier year, the limit is (broadly) now 4 complete tax years from the current one. There are many time limits which apply to specific claims but the overall limit is now basically 4 years, and if you have any mileage allowance, pension contributions or interest relief to claim for 2010/11, you had better be quick...