Personal Tax Planning

Everyone who is subject to taxation needs professional advice and support if they are to optimise their tax position and ensure they meet the compliance requirements.

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"Our specialist tax team can provide you with year-round advice on all aspects of personal taxation."

With the tax regime becoming more complex, and more focus being put on taxpayers’ individual responsibilities, everyone who is subject to taxation needs professional advice and support if they are to optimise their tax position and ensure they meet all the compliance requirements.

We can provide you with year-round tax advice on:

• Income tax
• Capital gains tax
• Inheritance tax
• Trusts and estates
• Non-domiciliary tax issues

Every pound of income tax you save means more income at your disposal, every well-planned disposal of assets means minimal loss of capital gains, and every inheritance tax saving means more benefit for your beneficiaries.

Dividend income

When dividends are received by an individual the amount received is the gross amount subject to tax. The availability of the Dividend Allowance (DA), means that the first £2,000 for 2021/22 of dividends are charged to tax at 0%. Dividends received above this allowance are taxed at the following rates:

• 7.5% for basic rate taxpayers
• 32.5% for higher rate taxpayers
• 38.1% for additional rate taxpayers

Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the £2,000 allowance.

Dividends are treated as the top slice of income and the basic rate tax band is first allocated against other income.

Switching investments

Given the lower amount of SA, higher and additional rate taxpayers could seek to maximise their use of the DA by moving investments out of interest bearing investments to ones which pay out dividends. This could be through direct shareholdings or through dividend distributing equity funds in unit trusts or OEICs.

In addition, assets held for capital growth could be transferred to dividend paying investments. Any gains realised by the investors on the sale of assets would be exempt up to the CGT exemption which is £12,300 for 2021/22 (£12,300 for 2020/21). Further gains over this amount are charged to tax at 20% for higher and additional rate taxpayers.

Interaction between DA and SA

If the amount of dividends an individual receives is covered by the DA but those dividends would have meant that they were higher rate taxpayers without the DA, then this would affect the amount of SA they would receive.

Gift Aid donations

Take care if you make Gift Aid donations. A charity can reclaim the tax on a Gift Aid donation only if the individual has paid the amount of tax being reclaimed.

Savings and dividend income covered by the SA and DA is not taxed. Where this happens the individual is responsible for ensuring that the donation is covered and HMRC has powers to recover any shortfall from the taxpayer.

Individual Savings Accounts

ISAs are tax-exempt savings accounts available to individuals. At Everest & Co – Accountants, we advise individuals on tax efficient investments in the West Midlands area. Some information about ISAs is given below.

Successive governments, concerned at the relatively low level of savings in the UK economy have over the years introduced various means by which individuals can save through a tax-free environment. 

ISAs are tax-exempt savings accounts available to individuals. At Everest & Co – Accountants, we advise individuals on tax efficient investments in the West Midlands area. Some information about ISAs is given below.

Successive governments, concerned at the relatively low level of savings in the UK economy have over the years introduced various means by which individuals can save through a tax-free environment. 

What is an ISA?

ISAs are tax-exempt savings accounts available to individuals aged 18 or over who are resident and ordinarily resident in the UK. ISAs are only available to individual investors and cannot be held jointly.

ISAs are guaranteed to run for ten years although there is no minimum period for which the accounts must be held.

Investment limits

The overall annual savings limit is £20,000.

Investment choices

Investors are allowed to invest in a cash ISA, an investment ISA, an Innovative Finance ISA, or a combination of the three subject to not exceeding the overall annual investment limit.

Investors are able to transfer their investments from a stocks and shares ISA to a cash ISA (or vice versa).

ISAs are allowed to invest in cash (including bank and building society accounts and designated National Savings), stocks and shares (including unit and investment trusts and government securities with at least five years to run) and life assurance.

A wide range of securities including certain retail bonds with less than five years before maturity, Core Capital Deferred Shares issued by building societies, listed bonds issued by Co-operative Societies and Community Benefit Societies and SME securities that are admitted to trading on a recognised stock exchange are eligible to be held in an ISA, Junior ISA or Child Trust Fund (CTF).

The Innovative Finance ISA can be used for loans arranged via a peer-to-peer (P2P) platform. Peer-to-peer lending is a small but rapidly growing alternative source of finance for individuals and businesses. The Innovative Finance ISA may also invest in debt securities offered via crowdfunding platforms.

Withdraw and replace monies

ISA savers may be able to withdraw and replace money from their cash ISA without it counting towards their annual ISA subscription limit for that year where they hold a ‘Flexible ISA’.

Additional ISA allowance for spouses on death

An additional ISA allowance is available for spouses or civil partners when an ISA saver dies. The additional ISA allowance is equal to the value of a deceased person’s accounts at the time of their death and is in addition to the normal ISA subscription limit. There are time limits within which the additional allowance has to be used. In certain circumstances an individual can transfer to their own ISA non-cash assets such as stocks and shares previously held by their spouse.

In most cases, it is envisaged that the additional allowance will be used to subscribe to an ISA offered by the same financial institution that provided the deceased person’s ISA. As the rules allow the transfer of stocks and shares directly into the new ISA, in many cases the effect will be that the investments are left intact and the spouse becomes the new owner of the deceased person’s ISA.

The tax advantaged treatment of ISAs continues whilst an individual’s estate is in administration.

Tax advantages

The income from ISA investments is exempt from income tax.

Any capital gains made on investments held in an ISA are exempt from capital gains tax.

Uses of an ISA

Many people use an ISA in the first instance, to save for a rainy day. Since they were first introduced people have used them to save for retirement, to complement their pension plans or to save for future repayment of their mortgage to give just a few examples. We have known young people, wary of commitment to long-term saving start an ISA and when more certain of the future use it as a lump sum to start another financial plan.

Help to Buy ISA

The Help to Buy ISA, which provides a tax-free savings account for first time buyers wishing to save for a home.

The scheme will provide a government bonus to each person who has saved into a Help to Buy ISA at the point they use their savings to purchase their first home. For every £200 a first time buyer saves, the government will provide a £50 bonus up to a maximum bonus of £3,000 on £12,000 of savings.

Help to Buy ISAs are subject to eligibility rules and limits:

• An individual is only eligible for one account throughout the lifetime of the scheme and it is only available to first time buyers.
• Interest received on the account will be tax-free.
• Savings are limited to a monthly maximum of £200 with an opportunity to deposit an additional £1,000 when the account is first opened.
• The government will provide a 25% bonus on the total amount saved including interest, capped at a maximum of £3,000 which is tax-free.
• The bonus will be paid when the first home is purchased.
• The bonus can only be put towards a first home located in the UK with a purchase value of £450,000 or less in London and £250,000 or less in the rest of the UK.
• The government bonus can be claimed at any time, subject to a minimum bonus amount of £400.
• The accounts are limited to one per person rather than one per home so those buying together can both receive a bonus.

Help to Buy ISA accounts were be available until 30 November 2019, when this type of account was withdrawn for new savers. Those individuals that already have an account can keep saving until 30 November 2029, when accounts will close to additional contributions. An individual must claim their bonus by 1 December 2030.

Lifetime ISA

A Lifetime ISA is available for adults under the age of 40. Individuals are able to contribute up to £4,000 per year and receive a 25% bonus on the contributions from the government. Funds, including the government bonus, can be used to buy a first home at any time from 12 months after opening the account, and can be withdrawn from age 60 completely tax-free.

Further details of the Lifetime ISA are as follows:

• Any savings an individual puts into the account before their 50th birthday will receive an added 25% bonus from the government.
• There is no maximum monthly contribution and up to £4,000 a year can be saved into a Lifetime ISA.
• The detailed rules are based on those for the Help to Buy ISA, in that the withdrawal must be for the purchase of a property for the first-time buyer to live in as their only residence and not buy-to-let. There are differences, however. In particular, the bonuses within the Lifetime ISA can be used to fund the initial deposit on the home whereas the Help to Buy bonus can only fund the completion of the purchase.
• The savings and bonus can be used towards a deposit on a first home worth up to £450,000 across the country.
• Accounts are limited to one per person rather than one per home, so two first-time buyers can both receive a bonus when buying together.
• An individual that has a Help to Buy ISA may transfer those savings into a Lifetime ISA, or continue saving into both. However, only the bonus from one account can be used to buy a house.
• Where the funds are withdrawn at any time before the account holder is aged 60 they will lose the government bonus (and any interest or growth on this) and will also have to pay a 25% charge.
• After the account holder’s 60th birthday they will be able to take all the savings tax-free.

Junior Individual Savings Account (Junior ISA)

Junior ISAs are available for UK resident children under the age of 18 who do not have a CTF account. Junior ISAs are tax advantaged and have many features in common with ISAs. They can be cash or stocks and shares based products. The annual subscription limit for Junior ISA and CTF accounts is £9,000 for 2021/22 (£9,000 for 2020/21).

A transfer of savings from a CTF to a Junior ISA is permitted at the request of the registered contact for the CTF.

CTF accounts started to mature in September 2020 when the first children reach 18. Without regulatory change the investments would lose their tax advantaged status. CTF and ISA regulations have therefore been made which:

• make sure that investments in CTF accounts retain their tax advantaged status post maturity, pending instructions from the account holder
• allow savings transferred from a matured CTF to be disregarded for the annual ISA subscription limit.

Property Investment – tax aspects

On the basis that the investment in property appears to make commercial sense what tax factors should you take into account? If you are considering property investment in the West Midlands area we, at Everest & Co – Accountants, can help you to make property investments in a tax efficient manner.

Investment in property has been and continues to be a popular form of investment for many people. It is seen as a route by which:

• relatively secure capital gains can be made on eventual sale
• income returns can be generated throughout the period of ownership
• mortgage finance is covered in repayment terms by the security of the eventual sale of the property and in interest terms by the rental income.

Of course, the net returns in capital and income will depend on a host of factors. But on the basis that the investment appears to make commercial sense, what tax factors should you take into account?

This factsheet should be considered only in relation to a UK resident property owner.

Who or what should purchase the property?

An initial decision needs to be made whether to purchase the property:

• as an individual
• as a joint owner or via a partnership (often with a spouse)
• via a company.

There are significant differences in the tax effects of ownership by individuals or a company.

Deciding on the best medium will depend on a number of factors.

Capital gains tax (CGT)

Each spouse’s CGT liability is computed by reference to their own disposals of assets and each is entitled to their own annual exemption of £12,300 for 2021/22 (£12,300 for 2020/21). Some limited tax savings may be made by ensuring that maximum advantage is taken of any available capital losses and annual exemptions.

This can often be achieved by transferring assets between spouses before sale – a course of action generally having no adverse CGT or inheritance tax (IHT) implications. Advance planning is vital, and the possible income tax effects of transferring assets should not be overlooked.

Further details of how CGT operates are outlined in the factsheet Capital Gains Tax.

IHT residence nil rate band

An additional nil rate band is available for deaths on or after 6 April 2017 where an interest in a main residence passes to direct descendants. The amount of relief is £175,000 for 2021/22. For many married couples and civil partners the relief is effectively doubled as each individual has a main nil rate band and each will potentially benefit from the residence nil rate band.

The additional band can only be used in respect of one residential property which does not have to be the main family home but must at some point have been a residence of the deceased. Restrictions apply where estates are in excess of £2 million.

Where a person died before 6 April 2017, their estate will not qualify for the relief. A surviving spouse may be entitled to an increase in the residence nil rate band if the spouse who died earlier has not used, or was not entitled to use, their full residence nil rate band. The calculations involved are potentially complex but the increase will often result in a doubling of the residence nil rate band for the surviving spouse.

The residence nil rate band may also be available when a person downsizes or ceases to own a home on or after 8 July 2015 where assets of an equivalent value, up to the value of the residence nil rate band, are passed on death to direct descendants.

Taxpayers now have three nil rate bands to consider. The standard nil rate band has been a part of the legislation from the start of IHT in 1986. In 2007 the ability to utilise the unused nil rate band of a deceased spouse was introduced, enabling many surviving spouses to have a nil rate band of up to £650,000. From 6 April 2020 some surviving spouses are able to add £350,000 in respect of the residence nil rate band to arrive at a total nil rate band of £1 million. However this will only be achieved by careful planning and, in some cases, it may be better for the first deceased spouse to have given some assets to the next generation and use up some or all of the available nil rate bands.

For many individuals, the residence nil rate band will be important but individuals will need to revisit their wills to ensure that the relief will be available and efficiently utilised.

Children

Use of allowances and lower rate tax bands

It may be possible for tax savings to be achieved by the transfer of income producing assets to a child so as to take advantage of the child’s personal allowance.

This cannot be done by the parent if the annual income arising is above £100. The income will still be taxed on the parent. However, transfers of income producing assets by others (eg grandparents) will be effective.

A parent can however allow a child to use any entitlement to the CGT annual exemption by using a ‘bare trust’.

Junior Individual Savings Accounts (Junior ISA)

The Junior ISA is available for UK resident children under the age of 18 who do not have a Child Trust Fund account. Junior ISAs are tax advantaged and have many features in common with existing ISAs. They are available as cash or stocks and share-based products. The annual subscription limit is £9,000 for 2021/22 (£9,000 for 2020/21).

High Income Child Benefit Charge

A charge applies to a taxpayer who has adjusted net income over £50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £50,000 the charge will apply to the partner with the higher income.

The income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Child Benefit claimants can elect not to receive Child Benefit if they or their partner do not wish to pay the charge.