The UK tax system is complex, there’s no denying it. And with the introduction of various COVID relief funds of late, it’s become even harder for the everyday individual to get their heads around it.
The good news is, Tax Planning exists – and tax planning strategies for individuals can be created too.
You might be thinking “How can I possibly plan how much Tax I am going to pay?” Well, it’s possible, and we’re here to tell how.
What is Tax Planning?
Tax planning is quite simply the process of arranging your affairs – making a plan – in order to legally minimise tax liability.
You’ll notice we emphasised the word ‘legally’, and that’s because contrary to popular belief, there are several ways in which individuals can legitimately reduce the amount of tax they are or will be liable to pay.
How? By understanding the wide range of reliefs and provisions in the UK.
Why are Tax Planning strategies important for individuals?
Tax Planning strategies for individuals are important. FACT.
They enable you to take advantage of opportunities which minimise your tax bill without breaking any rules or being deceitful.
Developing a tax plan and sticking to it will mean you get to keep hold of more of your finances to either invest or spend. There are times when you are starting a new business, acquiring or disposing a business, or even property, plant & machinery, where careful planning will be required.
AGRESSIVE TAX AVOIDANCE AND TAX EVASION ARE NO GO AREAS
Aggressive Tax Avoidance
Aggressive tax avoidance has and always will be a bit of a grey area. Of course, it’s frowned upon by the government, but the final decision is always made in court and a court hearing must take place.
Why? The courts need to determine whether there is manipulation of the law in a way that doesn’t represent the government’s tax intentions. It’s worth noting that if you’re ever in a situation whereby you’re unsure of whether your actions will be classed as tax avoidance, seek professional advice. HMRC will not take it lightly if found to be avoiding tax, and you’ll end up having to pay the full amount of tax which would have been due, PLUS INTEREST.
We discourage clients against aggressive tax planning or tax avoidance schemes. We ALWAYS advise clients to avoid taking advantage of tax legislation for which it was not designed for, i.e. promoting HMRC’s anti-avoidance legislation wherever it arises.
Tax evasion refers directly to an individual who deliberately avoids paying their tax. They are classed as being non-compliant with the law regarding payments, nor the policies.
As you can imagine, tax evaders deliberately break the rules to ensure that they don’t pay the correct amount of tax. Usually, it involves misrepresentation or concealment of the true state of finances to the authorities. TIP: Tax evasion is a PROSECUTABLE OFFENCE, so don’t be tempted. Failing to declare your full income or hiding tax assets just aren’t worth it.
At Shenward, we act for clients who may face HMRC inquiry under their most serious line of enquiry, Code of Practice 9. We have a successful track record in advocating clients’ positions to achieve an optimal outcome for all parties.
Tax Planning Recommendations
Now we get down to business. By now, you’ll understand that tax planning is legal, but that doesn’t mean to say you shouldn’t seek professional support. To give you an idea as to whether you could benefit from tax planning support, we’ve outlined our ideas and recommendations below.
Income tax ideas and recommendations
- Can you exchange part of your salary for benefits?
Exchanging part of your salary for tax free benefits is extremely valuable to those close to the higher tax threshold – between £100,000 and £150,000. Opting for tax efficient benefits can help you reduce your salary to under the threshold and is completely legal.
It’s important to note that since April 2017, the number of tax-free benefits on offer has significantly reduced, so you’ll need to ensure you’ve done your research. Examples of tax-free benefits include cycles for commuting and childcare vouchers – some even opt for onsite nurseries.
2. Can you take advantage of the dividend allowance?
Company owners paying themselves a salary can be tax efficient if they take advantage of the dividend allowance. The tax-free dividend allowance currently stands at £2,000. This means you can take £2,000 from your company every year outside of your salary without paying tax on it. Anything more than that is taxed based on your income tax band:
- Basic Rate 7.5%
- Higher Rate 32.5%
- Additional Rate 38.1%
3. Can you restructure your buy to let portfolio within a marriage?
Married couples have an added advantage when it comes to income tax. Where property is involved, if one member of the couple is a basic rate taxpayer and the other a higher rate taxpayer, it would make sense to ensure that the basic rate taxpayer should receive taxable rents. However, it’s a complicated process and if not managed correctly, you can end up wiping out the savings with other taxes triggered.
4. Can you incorporate let properties into a ltd company?
In certain circumstances, it may be beneficial to form a limited company to manage the property let portfolio. There are several advantages to incorporating your portfolio into a limited company; namely enabling mortgage interest relief which is tax deductible, taking advantage of lower tax rates (corporation tax at 19% and dividend tax at 7.5%), and future planning i.e. passing down wealth to your family. Taking your non-minor children into this company and gradually reducing your own involvement/ownership can be very tax-efficient in passing down your wealth.
There are several drawbacks though, such as capital gains tax which is payable upon transfer of properties, and it is unlikely incorporation relief would be available. Transactional costs such as stamp duty, legal fees, borrowing costs are also payable. So, it is vital to plan ahead. An alternative option could be the implementation of trusts. Which would help mitigate inheritance tax upon your death. This requires a detailed assessment of your current portfolio to determine whether this is a viable option.
5. Have you got a spare room you can rent out in your house?
Yes. There is such a thing as a ‘rent a room’ relief, and it’s been around for many years. The relief allows homeowners to rent a room for a value of up to £7,500 per annum before paying tax.
Carry back ideas and recommendations
- Can you use past capital losses?
Capital losses are carried forward indefinitely, so make sure you’re aware of the process and speak to your accountant.
- Are you using your annual exemptions?
In tax year 21/22 everyone is legally allowed to realise a capital gain up to the annual exemption threshold of £12,300. Whilst it’s available during the year, if not used, it cannot be carried forward.
- Can you use Investors Relief?
These are available to businesses and those with shares in personal companies only and cover holdover relief and rollover relief.
- Are you eligible for Business Asset Disposal Relief?
Formerly known as Entrepreneurs’ Relief. Previously each individual had a lifetime limit of £10m gains at which they pay a flat rate of 10%, as opposed to 20%. Lifetime limit reduced to £1m in 2020 Budget. It is still a very lucrative relief for those eligible businessmen/women and shareholders, provided the criteria are met.
- Can you utilise your spouse’s annual exemption?
Transferring 50% of the property before sale to a partner would mean it was treated as though your spouse was a joint owner from when the property was first bought.
- Can you claim relief when you sell your home?
Usually exempt under Principal private residence rules. If you let out your previous home and live elsewhere – you can claim PPR for the time you lived there.
Inheritance tax ideas and recommendations
- Can you switch your assets?
Inheritance Tax is always payable on the value of your estate if it exceeds £325,000. The good news is business assets and agricultural land have IHT exemptions. It’s always worth asking yourself whether you can switch your existing assets to things such as shares in private trading companies, or even agricultural assets as an example.
- Why not leave your family home to a dependent?
In the tax year 21/22, there is an additional Inheritance Tax nil rate band of £175,000 when a property belonging to a deceased loved one is left to a dependent – dependents are classed as biological, step or adopted.
- Why not make charitable gifts in your will?
Many people naturally want to leave part of their estate to charity when they pass but doing so can also reduce the need for your family to pay Inheritance Tax. Leaving at least 10% of the net value of your estate is usually the way to go. However, where the estate value is high, a reduced rate of 36% is charged where 10% or more is left to charity.
- Can you take advantage of equity release plans?
If you’re aged over 55, there are a numerous equity release plans available to free up funds for multiple purposes. It works by using the value of the home to release a lump sum, which is only paid back when the homeowner goes into long term care or passes. The benefit is that the homeowner can still continue to reside in the home.
- When did you last update your will?
Many people make a will and then never look back over it. Regularly reviewing your will as your family and financial circumstances change will help you understand what Inheritance Tax your family may be liable to pay.
- Consider leaving your ISA to a spouse/civil partner
Income and capital gains received through an ISA are tax-free throughout their lifetime, but when you pass, the value is added to your estate and becomes subject to Inheritance Tax. But, if you leave the ISA to your spouse of civil partner, they can’t legally be charged Inheritance Tax – gifts between spouses/civil partners are exempt.
Over the years, we’ve supported hundreds of people with their tax planning strategies, ensuring they are always acting legally and in line with HMRC regulations. If you’d like to find out how we can help you, please get in touch here.