Year-end tax planning
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The current tax year draws to a close on 5 April, so start thinking about making the most of those annual tax-free allowances, says Norwich chartered accountants Lovewell Blake.
Make use of your ISA allowance
An Individual Savings Account (ISA) is a savings account that allows the money invested in it to grow tax-free. That is, free of income tax and free of capital gains tax, although the values of ISAs are included in your estate for inheritance tax purposes.
The New ISA allowance (the amount you can invest each tax year) rose to £15,000 from £11,880 on July 1, 2014.
Consider topping up your ISA investments to the maximum tax-free amounts.
Pension investments are highly tax efficient. So much so, in fact, that both the current and previous governments have enacted legislation to reduce the amount you can pay in each year and still receive the relevant tax breaks.
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A qualifying investment in a registered pension scheme grows free of income tax and capital gains tax and the pension contribution itself is an allowable deduction from your income for the year. This means that a basic rate taxpayer’s contribution of £1,000 effectively costs £800, while a higher rate taxpayer’s costs £600 and an additional rate taxpayer’s costs £550. In fact, if your income is in the bracket around the £100,000 mark, the effective cost of a £1,000 pension contribution could be even lower due to the availability of personal allowances.
Consider making an investment into your pension scheme, but be sure not to invest more than your annual allowance, which is very broadly the lower of 100pc of your earnings or £40,000.
However, the rules around annual and lifetime maximum contributions are far more complex than this and you may well be in a position to invest more than £40,000 before the end of the tax year if you wish to use unused relief from earlier years.
Make use of your annual inheritance tax allowances
If the total value of your estate, after exempt transfers, is more than £325,000 your executors will usually pay inheritance tax on the excess over £325,000 at the rate of 40pc. One way of reducing the inheritance tax burden is to give assets away – but careful planning may be needed here to avoid triggering a capital gains tax charge.
Everyone has an annual allowance of £3,000 and total gifts up to this amount each year fall immediately out of your estate with no consequences. Any part of the previous year’s allowance which is unused can be carried forward allowing a maximum gift of £6,000 every alternate year.
Small gifts up to the value of £250 are exempt and the number of recipients is not restricted.
Gifts made in consideration of a marriage or civil partnership are exempt up to £5,000 if a gift from a parent, £2,500 from a grandparent and £1,000 from anyone else.
Larger gifts may be “potentially exempt transfers” but you need to survive any gifts for a period of seven years for them to fall entirely out of your estate. They must also be made without reservation of any benefits and be unconditional gifts.
Inheritance tax can be a severe burden on your loved ones in the event of your death but careful planning and an up to date will could produce huge savings.