End of Tax Year Planning
The end of the 2018/19 tax year is fast approaching and it’s your last chance to take full advantage of your tax free allowances and exemptions. The list below will help you take advantage of some of these and remember they must be used on or before the 5th April 2019.
The annual ISA allowance is £20,000 per person (£40,000 for a couple!). There is no difference in limits between a stocks and shares ISA and cash ISA so you can save the entire £20,000 in a cash ISA or invest it in a stocks and shares ISA. Alternatively you can have a mixture of the two providing you don’t exceed the £20,000 limit.
The benefit of ISAs is that you don’t pay income tax on the interest and they are not subject to capital gains tax.
Lifetime ISA (LISA)
These ISAs were introduced in April 2017 to help younger people save to buy their first house or if they don’t use it to buy a house, it can be used for retirement. You have to be between 18 and 40 to open a LISA and you have the option of a cash LISA or a stocks and shares LISA. The maximum you can invest is £4,000 which receives a government bonus of 25% (up to £1,000). Any contribution to a LISA forms part of your £20,000 ISA allowance.
Just like ordinary ISAs, there are Junior Individual Savings Accounts known as JISAs. They can be opened for children under 18 who don’t have a Child Trust Fund account. The child can take control of the JISAs from the age of 16, but cannot withdraw from them until they are 18. This year’s annual tax free JISA allowance is £4,260.
In the 2018/19 tax year you are able to place up to £40,000 into a pension (subject to UK relevant earnings). Any past years’ pension allowance which had not been used up can be carried forward, but only for the last three tax years. Using your pension allowance can significantly reduce the earnings you get taxed on, possibly bringing your earnings for tax purposes down into another tax bracket. With the increased flexibility on taking benefits from a personal pension, pension contributions are now even more appealing.
Please bear in mind that individuals with high earnings (adjusted income above £150,000) need to take care as the annual allowance is reduced by £1 for every £2 above this limit and professional advice is essential.
For those individuals whose earnings are in and around the tax band thresholds, some last minute planning may be tax efficient. Up until 5th April you can earn up to £46,350 without going into the 40% tax band (personal tax free allowance of £11,850 + £34,500). If your income exceeds £46,350 then additional pension contributions may be worth considering as higher rate tax relief may be available.
Capital Gains Tax
The annual CGT exemption is £11,700 for 2018/19 tax year. If you have unrealised gains, you may decide to dispose of some before the end of the tax year to use up your annual exemption. Married couples are taxed individually on capital gains, so transferring an asset from one spouse to another before realising a gain can be tax efficient. As far as possible it is important to use the annual exemption each tax year because, if unused, it cannot be carried forward.
Annual Inheritance Tax Exemption and Small Gifts
The first £3,000 given away each tax year is not subject to inheritance tax if you die. Amounts greater than £3,000 can later become subject to inheritance tax, if you die within 7 years. If you don’t use the exemption this year, you can carry it forward for one tax year and use it then. As such, if you want to use 2017/18 unused annual inheritance tax exemption, you must do so before 5th April 2019.
There is also the small gifts allowance, which means you can give up to £250 to any individual each year without being subject to IHT. For example, you could gift £250 to your grandchildren and great grandchildren and it would be immediately outside your estate for inheritance tax purposes. We would suggest keeping accurate records of any gifts made.
No decision should be taken based on the content of this article. Always take full individual advice first.