Taxation

Introduction to Taxation

Most of us face being taxed on our income, our capital gains, and in some circumstances the value of our estate when we die.

Taxation can be very complicated and the rules, reliefs and allowances often change, so it is worth obtaining a clear grasp of how these taxes work by discussing with a professional adviser the most efficient way to arrange your finances.

An expert will be able to help you plan your taxes in advance, and come up with effective strategies that will use the lawful reliefs and allowances to minimise the amount you have to pay.

By understanding how taxation works, you should be better prepared to manage your finances and you could save money in the long run.

One thing can be said for all forms of tax: if you do nothing, it is highly likely that you will end up paying more to the Government than you actually need to do.

TAX TREATMENT IS BASED ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX PLANNING.

Income Tax

Income Tax Allowances

The income tax Personal Allowance for the year 2018/2019, for people born after 5 April 1948, is £11,850 (2017/2018 – £11,500). If your total income is less than this during the tax year, you have no tax to pay.

Tax rates 2018-19: Income Tax Personal Allowances

  2018 / 2019 2017 / 2018
Personal Allowance £11,850 £11,500
Income limit for Personal Allowance(1) £100,000 £100,000
Income limit for Personal Allowance (for people born before 6 April 1948)(2) £28,900 £28,000
Maximum amount of Married Couple’s allowance for people born before 6 April 1935(3) £8,695 £8,445
Minimum amount of Married Couple’s allowance for people born before 6 April 1935(4) £3,360 £3,260
Blind person’s allowance £2,390 £2,320
Transferable Tax Allowance for married couples and civil partners(5) £1,190 £1,150

(1). The Personal Allowance reduces where the individual’s income is above this limit by £1 for every £2 of income above the limit. This reduction applies irrespective of date of birth.

(2). This allowance reduces where the individual’s income is above the income limit by £1 for every £2 of income above the limit until it reaches the level of the personal allowance for someone born after 5 April 1948.

(3). This allowance reduces where the individual’s income is above the income limit by £1 for every £2 of income above the limit until it reaches the minimum amount. Any reduction in the married couple’s allowance applies after any reduction to the individual’s personal allowance. Tax relief for the Married Couple’s Allowance is given at the rate of 10%.

(4). This is also the maximum relief for maintenance payments where at least one of the parties is born before 6 April 1935.

(5). Available to spouses/ civil partners born after 5 April 1935. This allowance is 10% of the personal allowance for those born after 5 April 1938 and allows a spouse or civil partner who is not liable to income tax above the basic rate to transfer this amount of their personal allowance to their spouse/ civil partner. The recipient must not be liable to tax above the basic rate. The recipient is eligible to a tax reduction of 20% of the transferred amount.

Income tax bands and rates 2018-2019

  2018 / 2019 2017 / 2018
Starting rate limit for savings £0 – £5,000 £0 – £5,000
Starting rate for savings income(6) 0% 0%
Basic rate band £0 – £34,500 (£12,150 in Scotland) £0 – £33,800 (£31,500 in Scotland)
Basic rate 20% 20%
Higher rate band £33,501 – £150,000 £32,001 – £150,000
Higher rate 40% (41% in Scotland) 40%
Additional rate band Over £150,000 Over £150,000
Additional rate 45% (46% in Scotland) 45%

(6). If, after deducting your Personal Allowance from your total income liable to Income Tax, your non-savings income is above this limit then the starting rate for savings will not apply. Non-savings income includes income from employment, profits from self-employment, pensions, income from property and taxable benefits.

The rates available for dividends are the 7.5 per cent basic rate, the 32.5 per cent dividend higher rate and the dividend additional rate of 38.1 per cent.

The self-employed can claim business expenses against their income. So make sure you include all possible justifiable business expenses on your self-assessment form. This also applies to capital allowances for expenditure on plant and equipment, including computers and tools, for example, used for your business.

It is worth remembering you may be able to pay further contributions to your pension, which can utilise unused tax relief.

Since its introduction in 1990, Gift Aid allows taxpayers to receive tax relief on gifts made to qualifying charities.

One other point to remember is if one spouse is a tax payer and the other is not or pays tax at a lower rate it is worth considering switching certain investments to take advantage of their unused tax allowances.

TAX TREATMENT IS BASED ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX PLANNING.

Capital Gains Tax

Capital Gains Tax Allowances, Liabilities & Reliefs

In the tax year 2018/2019, an individual’s CGT allowance has increased to £11,700 (2017/18 – £11,300).

This means you do not have to pay tax on gains from buying and selling shares or other investments during the tax year up to that amount. You do not normally have to pay tax on any gain you make when you sell your main residence.

  2018/2019 2017/2018
For standard rate taxpayers 10% 10%
For trustees and higher/additional rate taxpayers 20% 20%
Annual exempt amount – individuals £11,700 £11,300
Annual exempt amount – trusts £5,850 £5,650
Entrepreneurs’ relief lifetime limit £10,000,000 £10,000,000
Entrepreneurs’ rate 10% 10%

If you have used your CGT allowance, don’t forget your Individual Savings Account (ISA) allowance. An ISA can shelter capital gains on investments, for example unit trust holdings, worth up to £20,000 per year.

From 6th April 2008 Taper Relief was removed and a new relief called ‘Entrepreneurs’ relief’ was introduced to reduce the Capital Gains Liabilities on the disposal of certain business assets.

CGT is a tax on capital ‘gains’. If when you sell or give away an asset it has increased in value, you may be taxed on the ‘gain’ (profit). This doesn’t apply when you sell personal belongings worth £6,000 or less or, in most cases, your main home.

When do I have to pay CGT?

You may have to pay CGT if, for example, you:

  • sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset
  • receive money from an asset – for example compensation for a damaged asset

You don’t have to pay CGT on:

  • your car
  • your main home – provided certain conditions are met
  • ISAs
  • UK Government gilts (bonds)
  • personal belongings individually worth £6,000 or less when you sell them
  • betting, lottery or pools winnings
  • money which forms part of your income for income tax purposes

Important Considerations:

  • if you are married or in a civil partnership and living together you can transfer assets to your husband, wife or civil partner without having to pay CGT
  • you may not give assets to your children or others or sell assets to them cheaply without having to consider CGT
  • if you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts CGT
  • if someone dies and leaves their belongings to their beneficiaries, there is no CGT to pay at that time – however if an asset is later disposed of by a beneficiary, any CGT they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal

TAX TREATMENT IS BASED ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAX PLANNING.

Inheritance Tax

Inheritance Tax (IHT)

The IHT threshold is frozen at £325,000 until 2020/2021. Many people are still getting caught in the trap of property inheritance tax. Property IHT has not kept pace with the inflation of property prices, and so is affecting more and more people.

From 2018/2019 there is an additional Residence nil-rate band of £125,000 which will increase yearly. This is subject to 50% taper relief for estates above £2,000,000.

When a relative dies, and leaves an estate worth more than £325,000, families are required to pay tax on a proportion of the money and property left to them within six months. After that, they are charged interest.

Since inheritance tax was introduced three-decades ago, the rate has always been held at a relatively low level, but now the taxman has decided to raise the interest charge to penalise late payers. The rate charged for failing to pay an IHT bill within the six month deadline is now 3 per cent.

At the same time, however, HM Revenue & Customs (HMRC) has lowered the rate it itself pays in interest when it returns overpayments made on inheritance tax bills.

However, there are ways to lessen the burden of property IHT.

When you die, it is likely that you would wish to leave as much as possible for your loved ones. Unfortunately this is often not as simple as you might believe. HM Revenue and Customs (HMRC) will apply 40% tax to the value of your estate over and above that of the current threshold.

No IHT is applicable if the estate is being passed to a spouse, as the law sees your property as one estate together, unless there is a will stating otherwise, so nothing is being passed from one to another, it is merely no longer held jointly.

Your estate could include more than you originally realise. It is often easy to dismiss IHT as something that may not affect you as your property may not be over, or much over, the IHT threshold. However with all your other assets, such as investments, life cover, bank accounts, as well as physical property such as cars, furniture and family heirlooms, many estates are considerably over the threshold without the individuals being aware of it.

Please note that as of the 9th October 2007, the options for usage of the nil rate band for IHT reduction were relaxed. Before October 2007, if a spouse (or civil partner) were to die and leave their assets to their surviving spouse, upon the death of the remaining spouse, only one nil rate band was available.

For assets passed between spouses and civil partners, the nil rate band allowance will now pass along with the assets. This gives a couple available allowances (nil rate bands) of up to £650,000 (2018/2019).

With effect on and after 21 March 2012, if a person enters into arrangements through which they acquire an interest in excluded property such that the value of their estate is reduced, the reduction will be charged to IHT as if that person had transferred assets of that value directly to a relevant property trust.

The assets settled in the offshore trust will cease to be treated as excluded property and will instead become subject to the relevant property regime.

These provisions will also apply to existing schemes or arrangements entered into before 21 March 2012, but only in relation to periodic charges and exit charges that arise on or after that date.

TAX TREATMENT IS BASED ON INDIVIDUAL CIRCUMSTANCES AND MAY BE SUBJECT TO CHANGE IN THE FUTURE.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE INHERITANCE TAX PLANNING, TAXATION & TRUST ADVICE.