With Karl Nendick, Director & Independent Financial Adviser
Successful ‘Financial Planning’ is not just a case of investing in the most suitable, well performing investment funds, it has as much to do with investing in the most ‘tax efficient’ vehicle for your own personal circumstances.
Each year, the UK Government gives each of us legitimate Annual Allowances to utilise. These allowances could significantly impact upon the return or benefit you receive, positively it get them right, or negatively if you get them wrong.
We therefore wanted to summarise the current allowances that may be available to you before the current Tax Year End (5th April 2018), to see if any would benefit you:
Use ISA allowances – Don’t forget the basics!
Most people are aware that they have an ISA allowance but not everyone is aware that if you don’t use it you lose it! The current ISA allowance is £20,000 for the 2017/18 tax year and this can be saved into either a Cash ISA, Stocks & Shares ISA or a combination of the two! Please note Stocks & Shares ISAs do not include the same security of capital which is afforded with Cash ISAs. If you are going to save into a Stock & Share ISA make sure you seek financial advice to ensure you understand the risks as investments will rise and fall! In addition there are other ISA’s such as ‘Innovative Finance’ and ‘Lifetime ISA’s’ as well as ‘Junior ISA’s’ of course.
Use your Pension Allowance
Are you aware that you also have an allowance with Pensions? You are able to pay up to £40,000 (gross) each tax year (subject to having earnings of at least £40,000). If you have no earnings, you are still able to pay up to £3,600 (gross). Your employer can also pay into a pension on your behalf but your tax relief will work differently. A pension can be a tax efficient way to save for retirement as well as pass on wealth to your beneficiaries tax efficiently.
Inheritance Tax Gifting Allowances
You have an allowance called the ‘nil rate band’ which is the amount you are able to leave behind to your estate (when you pass away) without paying inheritance tax. This is currently £325,000, but if you are married you may be able to inherit a deceased spouse/partner’s nil rate band and effectively double the allowance to £650,000. If your estate (after taking away liabilities) exceeds your nil rate band, you will normally be taxed at 40%. However, (as with ISAs and Pensions) you do have annual gifting allowances available such as the annual exemption of £3,000 (with this you are also able to go back one year if the previous years’ allowance wasn’t used and gift £6,000). The benefit of doing this is you will reduce the size of your estate and therefore the tax bill. If you do not use your allowances and make gifts, these can potentially remain inside your estate for another 7 years, or if you make large gifts you may even suffer an immediate tax charge! There are other allowances available, including gifts on marriage.
In addition, there is a Main Residence Nil Rate Band. This measure introduces an additional nil-rate band when a residence is passed on death to a direct descendant.
This will be phased in as follows:
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
It will then increase in line with Consumer Prices Index (CPI) from 2021 to 2022 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.
The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.
However, there will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.
The existing nil-rate band will remain at £325,000 from 2018 to 2019 until the end of 2020 to 2021.
Capital gains tax allowance currently stands at £11,300 per tax year. In the April 2016 budget, the basic rate of capital gains tax reduced to 10% (from 18%) and the higher rate to 20% (from 28%). The previous higher rates can still apply in certain situations such as the sale of residential property (not your main residence). You then only pay tax on the excess over your allowance and there are some gains which are tax free such as selling your main residence, or your car.
If you are looking to make a large disposal from an investment which would be subject to capital gains tax near to the end of the tax year, you may be able to make a partial withdrawal in both the current tax year and the next to make use of both (tax year) allowances and to minimise any tax that would be payable.
For help & advice with this or any of your financial planning needs call Active Financial Planners on 01642 765957 or visit the website
The content of this blog is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.
Levels, bases of and reliefs from taxation may be subject to change.
The Financial Conduct Authority does not regulate taxation advice. Active recommends you speak to a Tax Adviser/Accountant for this; Active would be happy to introduce you to one of our close partners.