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Personal tax  •  Tax Planning

Tax planning ideas: 3 ways taxes might increase in the coming tax year

By RJP LLP on 24 January 2022

January can be a good time to take a close look at your personal tax situation because it allows enough time to take action if needed before the end of the tax year on 5 April. As tax advisers we appreciate that the only thing worse than paying tax is having to pay more tax than you need to.

It is highly likely that taxes will be increasing along with all our other costs – food, heating, clothing – almost everything we consume is increasing in price. In the case of taxes of course, the government needs to balance its huge spending deficit and the easiest way to do this, apart from printing more money, is by increasing taxes. Reading what other industry experts are predicting and using our own experience and insights, this is what we believe the government could target for change.

Tax on Trusts

Trusts as a tax planning vehicle have become less attractive in recent years as the cost vs tax benefits have slowly been eroded. It used to be possible to put an unlimited value of assets onto trust, but this is now capped at £325,000 before the settlor incurs a lifetime inheritance tax charge. There are also trust administration costs to pay and tax returns to file, plus the 10 year anniversary charge, all of which increase the cost and complexity of ongoing trust management.

Whilst trusts are still used for inheritance tax planning, in many instances they are now  established to retain control and management of family assets.

Two very feasible tax increases on the establishment and lifetime of trusts could include:

  • Full tax charges on assets at the at the point of transfer onto trust; and
  • Increases to the 10 year inheritance tax charges for trusts.

These changes would mean that whilst the asset control advantages of using a trust would be retained, the tax receipts for the treasury would increase.

Pensions tax changes

Whilst pensions have become less attractive for the very wealthy, pension contributions remain tax efficient:

  • Individuals earning up to £200,000 per annum can contribute and receive tax relief on 100% of their income with a cap of £40,000;
  • Those earning less than £3,600 can still receive tax relief on pension contributions of up to £3,600;
  • For those earning over £200,000, the pension contribution allowance is tapered, and those earning more than £240,000 can only contribute up to £3,600 per annum.

If an individual makes pension contributions in excess of their annual allowance, this excess is added to their annual income and charged to tax.

  • Either these contribution limits, or the earnings limit could be reduced.

The lifetime pension allowance has gradually been reduced and is now £1,073,100. This is of course a pension investment limit that is unlikely to be reached by any but the wealthiest and could be cut further, affecting only that small demographic.

There are also two additional reliefs that pension savings attract, and which could be cut:

  1. From age 57, individuals are able to withdraw 25% of the value of their pension savings tax free; this could be cut; and
  2. All pension savings are currently free from inheritance tax on death – this relief could be removed.

Capital gains tax increases

Despite all the rumours that capital gains tax rates were to increase, this has not yet materialised, and the government has said that it currently has no plans to review capital gains tax. The report that the government commissioned into capital gains tax did however include a number of comprehensive suggestions for how the tax could be increased, and this could be revisited by the government at any time.

The highest rate of capital gains tax payable currently is 28% on residential property gains and 20% on other gains. Compared with the rest of the tax system, these rates are low and they could be increased to generate a significant amount of extra income for the Treasury.

The rates could be banded in the same way that income tax rates are banded, thereby having the greatest effect on higher rate taxpayers.

Everyone currently has a £12,300 capital gains tax exemption each year which is not tapered according to level of earnings as the personal allowance is for income tax purposes; this could be brought into line with income tax.

VCT and EIS investments

VCTs and EIS investments are popular for investors seeking to obtain income tax relief on their investments, thereby minimising their risks. Whilst these reliefs could be reduced, it seems unlikely as the government seeks to incentivise corporate investment and start-ups.

Next steps?

Our advice to clients and readers is to carefully consider their options. It may well be advisable to take action in two key ways: 1) crystallise capital gains on the sale of assets before 5 April 2022 tax year end and 2) review pension contributions to make the most of current tax reliefs.

If you would like to discuss any tax planning ideas with us in more detail, please email partners@rjp.co.uk.

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60 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.

January can be a good time to take a close look at your personal tax situation because it allows enough time to take action if needed before the end of the tax year on 5 April. As tax advisers we appreciate that the only thing worse than paying tax is having to pay more tax than you need to.

It is highly likely that taxes will be increasing along with all our other costs – food, heating, clothing – almost everything we consume is increasing in price. In the case of taxes of course, the government needs to balance its huge spending deficit and the easiest way to do this, apart from printing more money, is by increasing taxes. Reading what other industry experts are predicting and using our own experience and insights, this is what we believe the government could target for change.

Tax on Trusts

Trusts as a tax planning vehicle have become less attractive in recent years as the cost vs tax benefits have slowly been eroded. It used to be possible to put an unlimited value of assets onto trust, but this is now capped at £325,000 before the settlor incurs a lifetime inheritance tax charge. There are also trust administration costs to pay and tax returns to file, plus the 10 year anniversary charge, all of which increase the cost and complexity of ongoing trust management.

Whilst trusts are still used for inheritance tax planning, in many instances they are now  established to retain control and management of family assets.

Two very feasible tax increases on the establishment and lifetime of trusts could include:

  • Full tax charges on assets at the at the point of transfer onto trust; and
  • Increases to the 10 year inheritance tax charges for trusts.

These changes would mean that whilst the asset control advantages of using a trust would be retained, the tax receipts for the treasury would increase.

Pensions tax changes

Whilst pensions have become less attractive for the very wealthy, pension contributions remain tax efficient:

  • Individuals earning up to £200,000 per annum can contribute and receive tax relief on 100% of their income with a cap of £40,000;
  • Those earning less than £3,600 can still receive tax relief on pension contributions of up to £3,600;
  • For those earning over £200,000, the pension contribution allowance is tapered, and those earning more than £240,000 can only contribute up to £3,600 per annum.

If an individual makes pension contributions in excess of their annual allowance, this excess is added to their annual income and charged to tax.

  • Either these contribution limits, or the earnings limit could be reduced.

The lifetime pension allowance has gradually been reduced and is now £1,073,100. This is of course a pension investment limit that is unlikely to be reached by any but the wealthiest and could be cut further, affecting only that small demographic.

There are also two additional reliefs that pension savings attract, and which could be cut:

  1. From age 57, individuals are able to withdraw 25% of the value of their pension savings tax free; this could be cut; and
  2. All pension savings are currently free from inheritance tax on death – this relief could be removed.

Capital gains tax increases

Despite all the rumours that capital gains tax rates were to increase, this has not yet materialised, and the government has said that it currently has no plans to review capital gains tax. The report that the government commissioned into capital gains tax did however include a number of comprehensive suggestions for how the tax could be increased, and this could be revisited by the government at any time.

The highest rate of capital gains tax payable currently is 28% on residential property gains and 20% on other gains. Compared with the rest of the tax system, these rates are low and they could be increased to generate a significant amount of extra income for the Treasury.

The rates could be banded in the same way that income tax rates are banded, thereby having the greatest effect on higher rate taxpayers.

Everyone currently has a £12,300 capital gains tax exemption each year which is not tapered according to level of earnings as the personal allowance is for income tax purposes; this could be brought into line with income tax.

VCT and EIS investments

VCTs and EIS investments are popular for investors seeking to obtain income tax relief on their investments, thereby minimising their risks. Whilst these reliefs could be reduced, it seems unlikely as the government seeks to incentivise corporate investment and start-ups.

Next steps?

Our advice to clients and readers is to carefully consider their options. It may well be advisable to take action in two key ways: 1) crystallise capital gains on the sale of assets before 5 April 2022 tax year end and 2) review pension contributions to make the most of current tax reliefs.

If you would like to discuss any tax planning ideas with us in more detail, please email partners@rjp.co.uk.