Personal taxation

Tax is one of the biggest costs incurred by individuals and it is therefore worth their time and expense to keep the amount paid to a minimum wherever possible. The Government’s aim is to tax a ...

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...risks, for example, investing in unlisted securities or being challenged by HMRC. Individuals need to be fully aware of all the potential consequences before definite strategies are adopted.

 

Any tax planning activity involves the use of a number of strategies, which for all individuals should firstly be to ensure that they use their available allowances and reliefs in full each year. Those individuals affected by the additional rate of income tax should attempt to reduce their income below the level affected, and those individuals who remain in the higher rate tax bracket but suffer a reduction in the personal allowance should also consider strategies to mitigate the effects of an effective increased tax rate on that tranche of their income.

How the income is actually reduced will depend on their individual circumstances and the types of income and assets they have. For example, for those affected by the additional rate of income tax,...

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...ion taken by the taxpayer aims to achieve a favourable tax result that Parliament did not anticipate when it introduced the tax rules in question, the main purpose of the arrangement appears to be tax avoidance, and course of action taken by the taxpayer cannot be regarded as reasonable, in other words, the arrangement appears to be abusive.

There are a number of safeguards built into the legislation to ensure that the taxpayer receives the benefit of any reasonable doubt.

HMRC also target those who design, manage and market tax avoidance schemes, and apply penalties to enablers of defeated tax avoidance schemes.

What is the first thing that all individuals should consider in any tax planning strategy?

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Income tax planning strategies will differ depending on individual circumstances.

Couples and partners

Married couples or those in civil partnerships may find that one pays tax at a higher level than the other, or that one does not have sufficient income to fully utilise their personal allowance.

There are a number of ways in which income can be transferred between spouses or partners and, unless otherwise stated, these strategies may also be applicable for those living together but not married or in a civil partnership. The important factor that must be remembered in any such transfers is that they must be absolute, meaning that the transferor is totally giving up any future benefit from the income. As this may give rise to later consequences, if there is a divorce, many individuals will be unhappy to do this. Care must also be taken with any absolute transfer as tax rules can change and outweigh any potential tax saving.

Tax allowance

Individuals can transfer 10% of their personal allowance to their spouse or civil partner, provided the receiving spouse or civil partner does not pay tax at the higher rates.

Investment and savings income

Where the income is investment income, the ownership of the actual asset could be transferred. However, if the parties involved are not married or in a civil partnership there could be a liability for capital gains tax or inheritance tax. Nevertheless, if an asset is transferred and a subsequent sale involves CGT being paid at the lower rate, a tax sa...

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...ar and for any fuel provided is normally charged only on the period for which it is available for use. This gives an immediate tax liability, even if only used for a short period of time. It may therefore be worth considering whether this benefit is actually worthwhile.. Zero-emission new cars qualify for capital allowances at the rate of 100%, so effectively are a deductible expense in the year of purchase for the employer. Cars with CO2 emissions up to 75 g/km are also treated more beneficially when it comes to salary sacrifice arrangements.

Self-employed people

From 2024/25, with a transition period over 2023/24, the current basis period rules changed to a tax year basis, meaning that profits are taxed in the tax year, regardless of the business’s accounting date.

There can sometimes be tax advantages for a self-employed individual to operate through a limited company, remembering that if profits are in excess of £50,000, the corporation tax main rate of 25% and marginal rate of 26.5% apply, compared with only 19% if profits are under £50,000. Although overall tax may be saved by changing the business status to a limited company, the decision must also be based on other factors such as, for example, the additional costs of administration in a limited company.

What benefit is there in paying a spouse or partner who works in a business a salary above the lower earnings limit but below the primary and secondary contribution thresholds for NICs?

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National Insurance contributions are generally paid by everyone over age 16 who is employed, self-employed or an employer, up to the end of the year in which the individual reaches state retirement age. Their payment builds up an entitlement to a range of state benefits, including the new State pension, new-style Jobseekers allowance (JSA) (class 1 only), the new-s...

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...ension age is currently 66 and it will increase to 67 between 2026 and 2028 and a recommendation has been made to increase it again to 68 from between 2041 and 2043. The Pensions Act 2014 provides for a review of the State Pension Age every 6 years.

Why would taking dividends instead of a salary avoid a liability for NICs?

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For those under age 75 pension planning is an important tax planning strategy, while for those over age 75 planning is also needed to maximise the benefits of the existing funds.

Any pension contribution attracts relief, and the contributions benefit from tax advantageous growth within the fund and a tax-free lump sum / pension commencement lump sum can be taken at retirement. Where an individual makes contributions net of tax, the grossed-up rate should not exceed the amount of income that is subject to higher or additional rate tax.

Up to £3,600 gross can be contributed annually to a pension for a spouse, partner or children with no earnings or earnings below £3,600. These contributions still benefit from the...

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... might only have suffered tax at 20% or 40% if paid directly to a named beneficiary. The trust might also be subject to 10-year periodic charges and exit charges.

Despite the possible disadvantages, a trust arrangement could still be appropriate the following situations:

Where it is important to ensure benefits are retained within the deceased’s family should a spouse or partner re-marry

Where beneficiaries are under age 18

Where death benefits might be considered in any assessment for the funding of long-term care of a spouse or partner

IAny pension contributions which remove dividend payments from the higher rate tax bracket produce a tax saving of up to how much?.s.

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The main aim in estate planning is to leave your affairs in an organised manner on death and although this may involve elements of tax planning there are also other issues to be considered.

Wills

Many people do not make wills and those who do frequently overlook the need to keep them under review. It is recommended that wills are reviewed at least every two years and more frequently if there are legislative changes affecting  the IHT rules. If a will has not been written in the most tax-efficient manner, it is possible for the beneficiaries to execute a deed of variation within two years, though this may still not be fully efficient in relation to all taxes.

Inheritance tax planning

The potential impact of inheritance tax is likely to become a higher priority as individual's age, but the earlier the planning starts the greater chance there is of reducing the tax liability. A general approach should include using all reliefs and exemptions that are available and taking into account the impact of other taxes.

However, before specific strategies are adopted it is essential to ensure that sufficient income and capital remains for the expected remainder of life. Making gifts can then be considered as well as the following strategies.

S haring assets between spouses/civil partners

In general terms, there is no CGT or IHT on transfers of assets between spouses/civil partners, so the sharing of assets can be beneficial. Now that any unused nil rate band can also be transferred, there is less need for ensuring that each partner has sufficient assets to fully utilise their own nil rate band, as any excess is not wasted.

Nevertheless, there is still a benefit in fully utilising the nil rate band on the first death, particularly where the assets being transferred away from the spouse/civil partner are expected to grow in value in excess of the increases in the nil rate band, or where second marriages are involved. However, it is also important to ensure that the surviving spouse/civil partner is not being left in tax-efficient poverty. Discretionary trusts can also be used to utilise the nil rate band on first death, and despite the complexities of the tax returns system, these provide a large degree of flexibility in managing an individual’s affairs after their death.

Where a surviving spouse or civil partner is not UK domiciled for IHT purposes, the amount of assets that ...

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...tate is tied up during probate

The settlor can also be a trustee, allowing an element of retained control of the gift

Family wealth can be protected from the effects of divorce or creditors or relatively young and immature potential beneficiaries

They are confidential, unlike wills

They ensure the intended beneficiaries will benefit from the trust fund

The three main types of trust used in IHT planning are:

Bare (absolute)

Interest in possession

Discretionary

Transfers to bare trusts are PETs for IHT purposes, which will be exempt after 7 years, and no lifetime tax is payable. If death occurs within 7 years, the PET becomes chargeable. It may fall within the nil rate band, leaving less nil rate band to be offset against the estate on death. If it exceeds the nil rate band, IHT will be charged on the excess but taper relief will reduce the tax if the donor survived at least 3 years. 

Transfers to interest in possession (IIP) and discretionary trusts are CLTs for IHT purposes, and lifetime tax is payable at 20% on any amount over the nil rate band, taking account of any CLTs in the preceding 7 years. In addition, such trusts are subject to periodic (10 year anniversary) charges on the value of the trust fund, and exit charges when capital is appointed to a beneficiary.

For lifetime gifts the basic strategy is now to:

Make gifts into discretionary trusts within the available amount of the nil rate band at seven-yearly intervals. The aim should be to ensure that the value of the assets under the trust does not exceed the nil rate band at the time of the ten-year anniversaries, to avoid the periodic and exit charges. Even if the assets do exceed the nil rate band, a charge of 6% should not be too excessive

Make outright gifts or gifts into a bare trust so that the donor has used their nil rate band

It should be noted that if part or all of the nil rate band is used up in lifetime and is not effectively reinstated by the passing of seven years, the relevant percentage will not be available for the surviving spouse/civil partner to use on their subsequent death.

Where 10% or more of an estate is left to charity, a reduced rate of IHT will apply.

Explain how assets can be transferred to a spouse or partner who is not UK domiciled for IHT purposes, in order ito avoid the restriction on the amount that can be transferred tax-free on death?

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Although covered in previous chapters, there are a number of points for consideration in relation to taxation in the financial affairs of individuals and trusts.

Gifts

Most gifts of investments will not qualify for holdover relief, so CGT could be payable without the benefit of any proceeds to pay it with. Holdover relief may be available where the gift consists of shares in the donor’s personal company or a furnished holiday letting, and also for gifts chargeable to IHT. Where business asset disposal relief is available, it may not be beneficial to claim holdover relief as it only defers a gain and the entrepreneur’s relief may not be available when they dispose of the gifted asset.

Minimising CGT

There are a ...

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...gifted. An ISA encashment will be completely tax-free and the cash gifted with no CGT implications. Withdrawals from a pension in excess of the 25% tax-free lump sum will be subject to income tax at the investor’s marginal rate, although the subsequent gift will have no CGT implications.

Charitable gifts

Gifts to charity are exempt from both CGT and IHT, and where at least 10% of a net estate is gifted to charity, a reduced rate of IHT applies to the remaining estate. Where certain assets are gifted to charity, the individual will benefit from income tax relief on the full market value of the gifts.

How can an ISA be used to create a ‘bed and breakfasting’ type benefit?

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AI is now being used by tax authorities to identify tax fraud, while companies are using it to ensure they remain compliant with changing regulations and predict future income streams and tax liabilities. ...

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...l adviser but is being used to improve the quality of advice being provided by modelling potential recommendations.

How is AI being used by exchange-traded funds?

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Chapter revision test. Your results and 7.6 hours of estimated study time will be added to your CPD certificate on completion. If you retake the test then additional CPD time for the test will be added.

Drag the correct strategy to the correct tax planning area.