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The Tax Hurdles. It’s the end of the tax year - are you match fit?

Posted on: 20 Mar, 18

Life often feels like you're running a race... and in tax terms you kinda are. We are now on the final straight with only a few weeks remaining before the tax year ends and there are some last minute hurdles you should consider jumping

Hey Oury… remember that friend of mine who woke up on 1st Jan 2018 with not only a hangover but also panicking about his self-assessment tax return?

Clark says...
Oury says...

Oh yes, I remember he was feeling smug with himself having bought a new property before the extra 3% stamp duty surcharge and a tax-efficient Tesla! What’s he gone and done now?!?

That’s the one but… it’s more about what he hasn’t done.

Clark says...
Oury says...

Ok… not sure I quite follow Clark

Sorry, that was a little cryptic! With the tax year-end fast approaching on April 5th he wants to make sure he has maximised his tax efficiencies wherever possible, can you help?!?

Clark says...
Oury says...

Right… with you now, of course. Well, there is some standard planning which can be achieved including:

Maximising your ISA allowance

That’s right he’s not hit the big “Four, O” yet! I’ve heard about peer to peer ISA’s is that a thing?

Clark says...
Oury says...

Yes, you can invest in Innovative Finance ISA’s (IF ISAs) however there are not that many providers at the moment, have a look at this tweet I posted about them.

One thing you can’t put in your ISA is Bitcoin or cryptocurrency! But you can “Bed & ISA”

No Bitcoin or crypto, that is a shame “Bed & ISA” – that sounds interesting, do I want to know what that is?!?

Clark says...
Oury says...

Steady Clark, should you not have used your ISA allowance and do not have any “fresh” cash to put into an ISA it can be advisable to transfer assets held outside the ISA wrapper into the ISA, benefitting from tax-free growth.

That sounds like a no-brainer – what’s the catch?

Clark says...

Capital Gains – Annual Allowance

Oury says...

Well, the asset will have to be sold and re-purchased in the ISA, generally at the same price, however, should the asset be standing at a gain there could be some capital gains tax to pay at 10 or 20 percent. Of course, cash from a non-ISA account to an ISA creates no gain.

What about the annual capital gains tax allowance?

Clark says...
Oury says...

That’s right Clark, the annual tax-free allowance for capital gains is £11,300 per person (17/18). Therefore it’s possible to fill your ISA allowance (£20,000) without crystallising a gain, provided you didn’t pay £1 for the asset originally!

Great, so… should my friend have some shares he is thinking about selling he may want to sell down part before 5th April and part after to make the best use of the annual allowance?

Clark says...
Oury says...

Correct – but just be careful as should you wish to take profit and reinvest back into the same fund you will have to wait 30 days otherwise “the gain” will not materialise.

I remember you said your friend had opened a limited Company during the year, so… his Company could make a pension contribution on his behalf or he could pay into a private pension independently.

Pension Contributions

Right, so he can make pension contributions personally or via his Company – what is the maximum in value he could contribute if he has unused allowances?

Clark says...
Oury says...

Well Clark…. as I always tell you with tax, IT DEPENDS!

The starting point is; you can only contribute relevant earnings which broadly consists of salary from employment or self-employed trading profits, it does not include dividends from investments including personal service companies or income from property rentals. It does include income from Furnished Holiday Lets (“FHL’s”).

Then the maximum permitted contribution in the current year is the lower of:

  1. 100% of your relevant earnings
  2. £40k or
  3. The tapered maximum with a cap at £10,000

Once the full current year allowance has been used then any carried forward allowances can then be utilised, starting with the earliest year first.

Oury, I love you and all but I am totally lost!

Clark says...
Oury says...

Ok, so, for example, you have made the following contributions:

  • 17/18: £30,000 – Current year
  • 16/17: £10,000
  • 15/16: £15,000
  • 14/15: £20,000

The allowance for each of the years was £40,000 and you had earnings of £100,000, this means you have the following unused allowances:

  • 17/18: £10,000 – Current year
  • 16/17: £30,000
  • 15/16: £25,000
  • 14/15: £20,000

The maximum additional contribution you can make is, therefore, the lower of:

  1. £85,000: carried forward annual allowances of £75,000 + £10,000 unused 17/18 allowance
  2. £70,000: balance of relevant earnings (£100,000 -£30,000 already paid into your pension)

Let’s say as much as you would like to make the maximum, you can afford a further £40,000 contribution. The first £10,000 would use up your allowance for the 2017/18 tax year, the next £20,000 would be taken from the balance remaining of the 2014/15 tax year and £10,000 from the 15/16 tax year leaving you the following balances:

  • 17/18: £0 – Current year
  • 16/17: £30,000
  • 15/16: £15,000
  • 14/15: £0

The total allowance for the 2018/19 tax year would include £40,000 annual allowance plus £45,000 of carried forward unused allowances.

Got it! Things are always a little clearer with an example, am I right in thinking my employer could also contribute to my plan?

Clark says...
Oury says...

Yes, that is correct but don’t forget the employer and employee contributions count towards the annual allowance.

OK – so what about his limited Company paying a pension contribution?!?

Clark says...
Oury says...

Well, Company directors generally take a small salary and larger dividends so they don’t have the relevant earnings for a personal pension contribution.

The limited Company can make a pension contribution on the director’s behalf without the relevant earnings criteria needing to be met

Really – how come?

Clark says...
Oury says...

Well the individual does not get tax relief on the contributions paid into the pension by the Company, so relevant earnings do not come into it

Wait so does that mean there is no tax relief if a Limited Company pays the pension?

Clark says...
Oury says...

Not quite! There is tax relief but it is the Company in this instance that gets the relief through a Corporation Tax deduction and the employee gets the tax free benefit of the pension contribution

Gotcha – all round a result for both the individual and the Company. Do you have any other year-end planning tips in regards to his Limited Company?

Clark says...

Dividend Allowance

Oury says...

As touched upon in January the tax-free dividend allowance of £5,000 is reducing to £2,000 from 6th April 2018. Should your friend not have declared an interim or final dividend should make sure they do so before the end of the tax year, providing they are able to do so.

Crickey the £5,000 allowance didn’t last long!

Clark says...
Oury says...

No, even with the additional tax take by removing the dividend tax credits the government wanted more… typical! Just make sure you have the correct board minutes and dividend vouchers in place when paying a dividend.

Yes, HMRC like paperwork! Thinking about his rental property he texted me to say his first tenant moved out, something to do with his wife – I don’t know. Anyway, he has new tenants lined up, an elderly couple, who want to move in on either 20th March or 10th April, before or after getting back from a cruise! As they are retired they are paying 6 months up front, does my friend care when this is paid?

Clark says...

Property Income

Oury says...

Interesting question, as discussed in January the amount of mortgage interest expense a landlord can deduct has reduced to 50%

Oh yes, I remember **@&”@**

Clark says...
Oury says...

Yes Clark, but there is no need for that language… getting back to your question.

From 6th April 2017 Landlords with rental income of less than £150,000 are automatically required to account for income and expenses on a “cash basis” i.e. when cash is received or spent. By default should your friend receive 6 months’ rent on 20th March, this would all be taxed in the 2017/18 tax year, tax payable 31/01/2019. The same rent received on 10th April 2018, the default position would be to tax this income in the 2018/19 tax year, tax payable 31/01/2020. Clearly pushing the liability out by 12 months.

Okay, good to know deferring by a few days can make a large difference to cash flow! Is there any other option than “cash basis” and anything else to consider?

Clark says...
Oury says...

Yes, although the cash basis is the default a Landlord can opt to use the accruals basis. This would smooth the income and expense, taxing only the portion of income received from 20th March to 5th April.

However, he may wish to calculate which would be best as in 2017/18 he is able to offset 75% of his mortgage interest against the income whereas in 2018/19 this reduces to 50%.

Ok, so it really depends on how geared he is and how cash flow is going. I imagine with his new business venture he will want to push out any tax liability to maintain cashflow.

Clark says...
Oury says...

Very possible, best to speak to his tax adviser for them to perform the calculations!

Indeed so to summarise:

  • Maximise ISA allowance – including LISA and IF ISA’s
  • No Cryptocurrency allowed in an ISA
  • Bed & ISA
  • Crystallise capital gains to annual exemption £11,300 (2017/18)
  • Make use of current year and carry forward pension allowance
  • Pay a dividend from a PSC, ensuring the correct paperwork in place
  • Property Income – look out for a reduction in mortgage interest relief
  • Push out any additional income or gains past 6th April 2018 if I want to maximise cashflow by increasing the time until I pay tax from 31/01/2019 to 31/01/2020!
Clark says...
Oury says...

Clark so pleased you managed to take all that in!…. only a month to go to make any changes!

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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.

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