Our ...February 2020 Newsletter
As the tax year end is looming on the horizon, our first newsletter of 2020 focuses on maximising the various tax allowances and exemptions available. We look at specific issues for year end tax planning, new tax changes that will come into force in April, and tax saving ideas/updates for the young (Junior ISA and Child Trust Fund updates) and the not so young (Pension Tax Tips and IHT considerations).
We hope you find the articles useful.
In this issue:-
- Have You Used Your ISA Allowances Yet?
- Tax Year End Planning
- Tax Changes Effective in April
- Top Tips on Pension Tax
- Good News for Child Trust Funds
Have You Used Your ISA Allowances Yet?
Just a reminder that you have until 5th April to use your 2019/20 ISA allowance. For adults, the allowance is £20,000 per person (£40,000 per couple) which can be saved to a stocks and shares ISA, cash only ISA or a mix of both.
For children, the Junior ISA allowance is £4,368 which can also be invested in cash only, stocks and shares or both. Anyone can gift or contribute to a Junior ISA and the money can only be accessed by the child once they reach 18.
Interest and dividends generated in ISA accounts are free of UK income tax, capital gains are free of CGT, and there is nothing to report on your tax return.
For more information about the different types of ISA accounts including the transfer of ISA allowances on death, click here to view/download our ISA information sheet.
For Junior ISAs, you can view our Junior ISA factsheet here.
Tax Year End Planning
With the tax year end fast approaching and the first budget of the new Government hot on its heels, we discuss some practical tax planning options you may wish to consider to utilise the available tax allowances and exemptions.
As noted in our article above, there are important tax benefits which are common across the different types of ISA:
- Interest earned on cash or fixed interest securities is free of UK income tax.
- Dividends are also free of UK income tax.
- Capital gains are free of UK capital gains tax (CGT).
- There is nothing to report on your tax return.
If you have not yet made your 2019/20 ISA contribution, now would be a good time to do so. A few years ago, the Treasury researched placing a cap on the total investment in ISAs. Income tax relief on ISAs now costs £3.3bn a year, nearly a third more than five years ago, making it a tempting target.
Note: Although the Help to Buy ISA scheme closed to new accounts at the end of November last year, contributions can still be made to existing accounts.
Over the last decade, the level of pension tax relief has been significantly reduced yet it remains one of the largest drains on the Exchequer.
The latest figure for the overall cost of income tax relief for pensions is £37.2bn for 2017/18. This includes £6.7bn of tax relief on pension fund investment income, meaning that the total relief for pension contributions amounted to £30.5bn.
The current pension tax system is starting to create serious problems in parts of the public sector and with rumours rife that the Chancellor is eyeing a potential raid on higher tax earners, some action may therefore be included in the Budget in March.
Inheritance Tax (IHT)
Every year the Treasury receives millions of pounds paid in IHT, yet much of this could have been avoided with careful planning and thinking ahead. Here are 3 common scenarios you may wish to consider before the end of this tax year:
1. The Annual Exemption
Each tax year you can give away £3,000 free of IHT. If you do not use all of the exemption in one year, you can carry forward the unused element, but only to the following tax year, when it can only be used after that year’s exemption has been exhausted
2. The Small Gifts Exemption
You can give up to £250 outright per tax year free of IHT to as many people as you wish, so long as they do not receive any part of the £3,000 exemption.
3. The Normal Expenditure Exemption
This is potentially the most valuable of the yearly IHT exemptions. Currently, any gift is exempt from IHT provided that:
- you make it regularly;
- it is made out of income (including ISA income); and
- it does not adversely affect your standard of living.
It could also be worth making large lifetime gifts before the Budget. There have been suggestions in some quarters of basing a reformed IHT on gifts made (or received) throughout life. At present, outright gifts made more than seven years before death generally have no IHT consequences.
For more tips on reducing your IHT liability click here to read our factsheet: 5 Tips to Reduce your IHT Burden
For help with any of the issues noted above, please contact your usual JJFS contact or call us on 01789 263257 or email firstname.lastname@example.org.
Tax Changes Effective in April
The new tax year heralds a change in tax rules and we have highlighted below some of the changes that will come into effect on 6th April 2020.
Tax relief on mortgage interest completely removed
The final stage of the phased removal of mortgage interest relief will be effective from 6th April. Previously, property landlords could claim the interest paid on their mortgage as an expense to reduce their tax bill. From April, landlords will instead receive a 20% tax credit against their total mortgage interest payments, leading to some significant tax hikes for higher/additional rate payers.
A ‘Seismic Change’ to Payment of CGT on Property
From 6th April, taxpayers will have only 30 days from the date of sale of the property to file their Capital Gains Tax return and make an advance payment towards their tax bill. Under the previous rules, taxpayers had up to 22 months to pay CGT, which was reported and settled as part of the annual self-assessment return. The Chartered Institute of Taxation has referred to this as a ‘seismic change’ in how tax is paid.
Capital Gains On Disposal Of Residential Property
April also sees the removal of the £40,000 Letting Relief. This was previously available where a property had been the main residence of the seller and then subsequently rented out, prior to the sale. However, the relief may still be deductible if the letting occurred whilst the seller was still living at the property.
Also, the qualifying period for principal private residence (and therefore exempt from tax) is reducing from 18 months to 9 months, effectively halving the amount of relief available from April 6th.
On the Plus side….
Residence Nil Rate Band
The RNRB threshold reaches its maximum threshold of £175,000 effective 6th April 2020, thereby creating the potential of £1m IHT relief on an estate up to the value of £2m. Under the RNRB, the first £175,000 of the net value of a property is exempt from IHT if it is passed to a direct descendant (i.e. children, grandchildren, step-children, foster or adopted children) and is in addition to the existing Nil Rate Band of £325,000. As both reliefs are transferable, the survivor of a married couple leaving their entire estate to their direct descendant could achieve the full £1m relief. Click here to read our factsheet for more information about the RNRB.
Top Tips on Pension Tax
The rules regarding pension tax differ significantly from lower to higher rate payers but not everyone is aware of this. We have therefore highlighted below three common areas which should help ensure you get all the pension tax relief to which you are entitled and/or avoid an unexpected tax bill in years to come.
1. Are you claiming higher rate relief on your personal pension contributions?
Many pension savers who pay income tax at the higher (or additional) rate, may be unaware that higher rate relief on contributions into a personal pension must be claimed through a tax return.
Employee contributions into a personal pension or group personal pension automatically attract pension tax relief at the basic rate through the ‘relief at source’ method. This tax relief is claimed by the pension provider on behalf of the member. But those who pay tax at the 40% or 45% rate will only get their extra tax relief if they claim it through their tax return.
For example, if you pay £80 into a personal pension you will automatically receive an extra £20 in basic rate relief added to your pension. But if you are a 40% taxpayer you are entitled to another £20 in tax relief which you will only receive if you enter this information on your tax return.
If you are unsure how to claim the extra relief, here’s a link to our factsheet which provides details on how to do this.
2. Are you reporting contributions in excess of your annual allowance?
Did you know you are expected to report any pension contributions (from you or your employer) that exceed the Annual Allowance – specifically, contributions into a Defined Contribution Pension and/or any growth in Defined Benefit pension rights that put you in breach of the allowance. You will be required to pay additional tax and all relevant details must be reported. Please contact us if you think this may affect you.
3. Are you reporting contributions made on your behalf under ‘scheme pays’?
‘Scheme pays’ is a process that allows an individual to pay an annual allowance charge from their pension scheme. This means the scheme pays the annual allowance charge direct to HMRC on your behalf and the tax charge is taken out of your pension savings. As a taxpayer you must report this on your tax return. However, recent figures from HMRC estimate that thousands of taxpayers are failing to do so. Although this is more a case of ‘under-reporting’ rather than ‘under-payment’, taxpayers are still expected to give complete information on their tax return.
To discuss this further, please get in touch with your usual JJFS contact or email email@example.com
Good News for Child Trust Funds
Young people with a Child Trust Fund (CTFs) could see their savings automatically rolled into a new tax-free savings accounts at maturity under new government proposals.
The first Child Trust Funds are due to mature in September this year and, under current arrangements, will be automatically cashed in once the account holder turns 18. CTFs could instead be automatically rolled over into another account that continues to shelter the young saver’s cash from the taxman.
Child Trust Funds were launched in 2005 as a way to encourage parents to start saving for their children. Children born between September 1, 2002 and 2 January 2, 2011 received between £250 or £500 to be invested on their behalf. Parents, family and friends could continue to contribute to the account, with all gains tax-free.
More than 6 million CTF accounts were opened and no money could be withdrawn until the child reached age 18. That means the first tranche of accounts will mature in September 2020. But CTFs were discontinued in 2011 and replaced with the Junior ISA. For years, children with CTFs were left in limbo as savings providers stopped offering new products as Junior ISAs took precedence. In 2015, the Government ruled that money held in CTFs could be transferred out to a Junior ISA but for those who kept their money in a CTF, the money would automatically cash out once the accountholder turned 18. Many considered this to be unfair, as Junior ISAs are automatically rolled into adult ISA accounts when the child reaches 18, meaning they continue to enjoy their tax-free status. The Government’s latest move looks to be levelling up the playing field.
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