After the January Tax Returns have been filed and taxes paid, the lull between now and the end of the tax year is a good time to undertake some basic work on your affairs to ensure that everything is up to date. So this month, a few things to consider on your personal affairs before 5 April arrives:
Annual Dividend Allowance (1)
If you have the ability to adjust your dividend income – possibly by transferring stocks and shares to your spouse – consider that the annual dividend allowance amounts to £5,000 per person for 2017/18, regardless of the level of your other income. Transfers between married spouses or civil partners are free of tax, but you need to be careful of the settlement legislation and possibly take advice in your particular circumstances
Annual Dividend Allowance (2)
The annual dividend allowance will drop from £5,000 per person to only £2,000 per person from 5 April 2018. As dividends are now paid gross, without deduction of income tax, could this reduction now cause you to have a tax liability on any dividends you receive above the annual limit of £2,000?
If so, will you need to register and file a Self-Assessment Tax Return from April 2018 onwards?
Annual Gift Exemption
Any person may gift assets free of Inheritance Tax (IHT) of up to £3,000 in 2017/18 (£6,000 if the 2016/17 allowance was not used). For a married couple gifting before and after the end of the tax year, if your circumstances permit, you could potentially gift away £18,000 in two tranches in April and immediately save IHT of (£18,000 x 40%) £7,200 for your beneficiaries. This works if you (are able to) gift £6,000 each on 5 April (making use of the unused allowances from 2016/17 and 2017/18) followed by another £3,000 each on 6 April to utilize the 2018/19 allowance. The gifts need not be in cash as the IHT is concerned with the value of the asset being gifted. However, you should bear in mind any Capital Gains Tax (CGT) implications that may be involved for non-cash assets
The annual Gift Allowance is an allowance, not a limit. Most gifts greater than the available allowance become “Potentially Exempt Transfers” (PETs) which will take seven years to completely leave your estate for IHT purposes. However, if the assets are surplus to requirements, consider making a gift sooner rather than later in order to start the seven-year clock running. Again, remember that there may be CGT implications as well as IHT ones but for IHT purposes, you are no worse off by making a PET gift now and if you survive the seven years, your beneficiaries will be 40% better off.
And More Gifts
More complicated planning arrangements can involve Trusts. Transfers into these are not PETs but make use of your estate exemption of £325,000 which then takes seven years to recover. Trusts are more complex but often have the tax advantage of deferring any CGT on the gift and also enable the assets to be protected and controlled after your death rather than being immediately under the control of the beneficiary. Detailed professional tax and legal advice is required but the potential savings for your future beneficiaries can be large
Nowadays a lot more options are available including the (basic) ISA, Lifetime ISA, Help-to-Buy ISA, and the Junior ISA – all of which have different allowances and benefits. The basic ISA’s limit is now £20,000 per person and still enables Income and Capital Gains Tax free investments (over and above the interest and dividend allowances).
Capital Gains Tax Allowance
Amounts to £11,300 for the current tax year. If you have not already used this allowance, you may like to consider bringing forward some sales to use this exemption where possible. If good use of the CGT allowance is not possible, consider whether it is possible to crystalise any losses before 5 April, possibly using “Bed and Spouse” if you wish to retain the investments. Any CGT losses will be available to be carried forward against future gains (though some restrictions can apply for transactions with family members or other “connected persons”). Transfers of assets between spouses is still CGT and IHT free but HMRC are known to look closely at assets that are transferred intra-family just prior to a disposal to determine whether the transfer happened purely for tax reasons. Specialist advice should be sought if unsure.
So whilst most may try to ignore their tax affairs until the next time HMRC send you some fan mail, by considering your affairs before the end of the tax year, you could potentially make your affairs more efficient and ultimately save tax.