Guide to tax
For individuals, there are three main taxes to consider:
When planning for your financial future, it is important to understand the characteristics of each type of tax so that you can structure your finances in a tax-efficient way and understand tax implications of certain types of investments.
We are unable to provide specific tax advice, however, we do work closely with accountants who are able to provide bespoke tax advice.
The Financial Conduct Authority does not regulate taxation and trust advice
Tax is payable on the amount of your income (earned and unearned) less allowances. Everyone is given a personal allowance on which no tax is payable.
This allowance increases at age 65 and again at age 75. Married couples – allowance only applies where at least one partner was born before 6 April 1935.
You need to be clear as to how your investments affect your tax position. For example if the level of your income falls below the total of your allowances, investments could be made in areas where gross returns are obtainable, or at least where tax is recoverable.
The earnings and investment income of a husband and wife are taxed separately at their individual rates, so that a wife?s investment income is taxed at her own rate without regard to her husband?s. Careful thought needs to be given, therefore, as to the name in which investments are made. If investments are held jointly, they are normally deemed to be held on a 50/50 basis.
Capital gains tax
When is CGT payable?
You may have to pay CGT if, for example, you:
- Sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset
- Receive money from an asset - for example compensation for a damaged asset
You don't have to pay CGT on:
- Your car
- Your main home - provided certain conditions are met
- ISAs or PEPs
- UK Government gilts (bonds)
- Personal belongings worth £6,000 or less when you sell them
- Betting, lottery or pools winnings
- Money which forms part of your income for income tax purposes
These are some points to bear in mind:
- If you are married or in a civil partnership and living together you can transfer assets to your husband, wife or civil partner without having to pay CGT
- You can't give assets to your children or others or sell them assets cheaply without having to consider CGT
- If you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts CGT - for example you cannot set a loss on selling your car against gains from disposing of other assets
- If someone dies and leaves their belongings to their beneficiaries, there is no CGT to pay at that time - however if an asset is later disposed of by a beneficiary, any CGT they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal
How is CGT worked out?
CGT is worked out for each tax year (which runs from 6 April one year to 5 April the following year). It is charged on the total of your taxable gains, after taking into account:
- Certain costs and reliefs that can reduce or defer gains
- Allowable losses you have made on assets to which normally CGT applies
- The annual exempt (tax-free) amount (the AEA) - remains at £11,100 for every individual in the tax year 2016/17
With effect from 6th April 2016 two new rates of capital gains tax were introduced. For basic rate tax payers, a rate of 10% and for higher rate tax payers a rate of 20%. As part of this new system the annual exempt amount of £11,100 (2016/17) remains in place.
Business assets enjoy particularly favourable relief - reference should be made to an accountant for full details. Broadly speaking gains arising on the disposal of certain business will qualify for an effective rate of CGT of 10% (2016/17).
When you die your chargeable estate is valued. This is basically the value of property and investments, less any debts, and excluding certain exempt assets (such as assets left to your spouse, charity or approved national causes).
Tax is then levied on any sum in excess of the IHT exemption which is usually amended at each Budget. From 9 October 2007 it has been possible to add the proportion of unused nil-rate band from the first death to the surviving spouse or civil partner's own nil-rate band when they die.
This can effectively double the current allowance where one nil rate band would otherwise have been wasted.
The 2007 Pre Budget Report introduced with immediate effect the concept of a "transferable nil rate band"; strictly speaking - the transfer of the unused proportion of the nil rate band of the first of a married couple or civil partners to die and the application of that unused proportion to the nil rate band in force on the death of the survivor.
The executors for the estate of the surviving spouse may therefore have use of a combined nil rate band up to a maximum figure of £325,000 per person (2016/17).
The Government has now passed legislation which will mean the introduction of a new Main Residence Nil rate band in 2017. This will increase personal IHT allowance on an individual’s main residence by £100,000 , increasing to £175,000 by 2021. This allowance is in addition to the normal rates and only applies to the family home.
Potentially exempt transfers are gifts that do not give rise to an immediate liability, but which carry an underlying charge to tax that crystallises if the transferor dies within seven years of making the gift. If you survive for the full seven years, no tax is payable. Most lifetime transfers to individuals (not covered by the annual IHT exemptions) are potentially exempt. You should plan to use all of the available exemptions before making this type of gift.
The impact of Inheritance Tax can be reduced significantly with careful planning and by the careful construction of a Will. Wardour Partners will be pleased to advise you. You may want to request our Guide to Inheritance Tax.
The Inland Revenue usually dispatches self-assessment forms immediately following the end of the tax year to be assessed.
There is, however, a lot to be said for submitting a paper return before the 30th October - this will guarantee the completion of the tax calculations by the Inland Revenue and will give you the option of having small tax underpayments collected through PAYE coding adjustments.
Do not leave everything to the last minute, if you miss the final filing deadline of 31st January following the end of the tax year, you will leave yourself open to interest, penalties and surcharges.
Tax Tips -
- Make sure that you use personal income tax reliefs and capital gains tax allowances, wherever possible, consistent with your own investment objectives.
- Divide both assets and income (where possible) between husband and wife to take full advantage of the independent taxation rules.
- Make use of all your entitlements to invest in tax efficient investments such as ISAs and National Savings.
- Consider your options carefully before paying off your mortgage.
- Ensure that your investments are correct for your personal circumstances and sufficiently flexible to allow for changes in family finances and circumstances and tax legislation.
- Review investments each year in the light of Budget changes. What is right for this year may not be next year.
- Advance planning can significantly reduce potential liability to inheritance tax, but take care to ensure that gifting money is not done at the expense of your future financial security.
- Make sure the Trustees of your occupational pension scheme hold an up to date Nomination form setting out to whom you wish any lump sum benefit paid.
- Retain all tax papers, interest details, P60, P11D, etc in a safe place so that you can complete tax returns promptly and accurately.
- Check tax assessments and notices of coding for accuracy. If in doubt, contact the tax office for clarification