As the days start to lengthen and the end of the tax year (5 April) approaches, it is a good time to consider whether any action should be taken to ensure that available tax reliefs and opportunities are maximised.
This is a wide subject, but there are some basic steps that can be considered by the majority of taxpayers.
Income Tax Opportunities
As well as the annual personal tax allowance (£12,570 for 2024/25), which can be set against any source of income, remember that specific taxfree allowances are available to reduce the taxable amounts of dividends and interest. Consider whether their use can be maximised by, for example, advancing or deferring income from one year to another. This might be done by closing an account and opening a new one. For spouses or civil partners, shareholdings or accounts might be transferred to ensure these are used.
Interest or capital gains can be sheltered within a cash or a stocks and shares ISA.
Capital Gains Tax
The annual capital gains tax (CGT) exemption has been much reduced to its present level of £3,000. This exemption cannot be carried forward, so consider whether assets might be disposed of and reacquired to use it. The share identification rules can restrict such transactions (see HMRC’s Capital Gains Manual at CG51560) if the same assets are reacquired within 30 days. However, this rule does not apply if the assets are reacquired within an ISA or by a spouse or civil partner.
If assets such as shareholdings are standing at a loss, consider whether a disposal could crystallise that loss, which could then be set against a gain on the disposal of another asset or assets.
Inheritance Tax
The thought of inheritance tax may not appear to be an immediate issue for most, but there are simple steps that can be taken to mitigate a future potential liability.
Gifts of money or assets made by a donor who survives for at least seven years after the transfer will not be taken into account in calculating the value of their estate on death. Gifts within three years of death are included in full and a sliding scale applies between three and seven years. There is also an annual exemption of £3,000 per person, so gifts below that amount are excluded from an estate and, unlike income tax and CGT, this annual exemption can be carried forward for one year if not used. Spouses and civil partners have their own exemptions.
As well as other specific exemptions for small gifts and gifts on marriage, there is also an exemption for gifts made out of income, which is commonly overlooked. Such gifts must be part of the donor’s normal expenditure, so a one-off gift would be unlikely to qualify unless there is evidence to show that this was intended to be the first of a series of such gifts. The gift must be made from income rather than capital and the donor must be able to show that they still have enough income to maintain their normal standard of living. Recordkeeping is essential here and such gifts should probably be evidenced by an accompanying letter with the donor retaining a copy.
As well as gifts between spouses and civil partners, some gifts – such as for the maintenance of old or infirm relatives, and to charities or political parties – are also exempt with no limit imposed.
Conclusion
As the end of the tax year approaches, a simple review of potential income and capital gains for the year and a check of the eligible tax reliefs may uncover opportunities to save tax immediately or in the future.
Practical Tip
Remember that pension premiums continue to attract tax relief at the taxpayer’s highest rates, and these can be even more tax-efficient if income exceeds the £100,000 threshold at which £1 of personal allowance is lost for every £2 of additional income. This results in a high marginal rate of tax for those with income between £100,000 and £125,140.