YEAR END TAX PLANNING TIPS 2016For individuals

The last couple of Budgets have made more tax changes to the financial plans of individuals than we have seen for many years. Those changes concerning personal pensions and dividends are the most important and for some people they will need to take action before 6 April 2016.

The award winning Mazars private client team are in the best position to advise you and this bulletin outlines some of the best personal tax planning tips for you to consider before the tax year end on 5 April 2016, including how to:

• reduce your personal tax rate;

• take advantage of tax reliefs and allowances;

• increase investment returns through tax efficient investing;

• make sure you maximise your pension before the new rules kick in;

• reduce the tax due on disposal of assets and property; and

• help you leave as much as you can to your family when you die.

These are just a few legitimate and often simple, tax planning opportunities available to help you minimise your tax bill.

when opportunity meets with planning, good fortune is the result.

Tax planning…verb…

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• Income over £150,000 per annum is taxed at 45% but because you lose the personal allowance, income between £100,001 and £121,200 is taxed at an eye-watering effective top rate of 60%! We recommend you consider the following tips to reduce your tax bill:

• Individuals with incomes near these thresholds could cut their tax liabilities by reducing their taxable income below £121,200 or £150,000.

• Consider making pension contributions or payments to charities or community amateur sports clubs all of which will reduce your taxable income.

• Consider transferring income yielding assets to your spouse or civil partner who may pay tax at a lower rate or pay no tax at all. If this isn’t possible ask your Mazars adviser for ways to turn your income into more tax efficient forms.

• If you can vary your income, e.g. by maximising tax relief claims or business investment you can reduce your 2015/2016 income tax payments on account: if this year you expect to earn less than last or have substantial tax relief claims, then your payments on account due on 31 January and 31 July 2016 could be reduced. Better in your bank account than that of HMRC!

• You may be able to transfer private company shares to utilise exemptions and rate bands of your spouse and other family members. But seek advice of any tax consequences of doing so.

• Capital gains tax (“CGT”) is charged at 18% or 28% depending on your circumstances. Consider transferring assets to a spouse or civil partner who may pay tax at the lower rate.

• If you own a trading business, Entrepreneurs Relief can reduce your rate of CGT to 10% instead of 18% or 28%, up to a lifetime limit of £10 million capital gains. The rules are complex and often planning needs to be in place a year before disposal so talk to your Mazars adviser.

From 6 April 2016 how individuals are taxed on dividends they receive, will change. The introduction of a £5,000 pa. tax free dividend allowance for everyone almost seems too good to be true. Most basic rate taxpayers will be no worse off unless they have dividends in excess of £5,000 per annum. If they go over that they will pay tax at 7.5%. For higher rate and additional rate (40% and 45% respectively) tax payers, the £5,000 allowance means they are £1,250 and £1,530 better off each year as long as their dividends do not exceed £21,660 and £25,400 p.a respectively.

Remember the full amount of the dividend received, even if covered by the allowance, will still count towards total income for tax purposes.

So if you are trying to build up a tax free fund consider these planning tips:

• make sure you have an ISA and make full use of it;

• keep your dividend income below £5,000 p.a. in 2016/2017;

• consider realising capital gains annually from your share portfolio within the annual CGT exemption;

• If you will pay more ‘dividend’ tax in 2016/2017 you should take advice about bringing forward a dividend and paying it before 5 April 2016.

• The new dividend allowance makes a compelling argument for building up a collective portfolio where the income and gains can be managed within the respective allowances: and

• Consider offshore bonds to protect the excess dividends from an immediate tax charge as they arise (they defer the tax until the bond is surrendered perhaps when you are a lower rate or non-taxpayer).

Beat the tax band

PERSONAL

£5k dividend allowance

Exchange salary for benefits

The kids are alright

• An increasing number of employers offer arrangements allowing employees to sacrifice cash payments for share options, benefits in kind or pension contributions in lieu of salary.

• Employees who sacrifice income, for example, to take them below the £100,000 threshold, in return for a tax free pension contribution made by their employer, could save income tax and NIC.

• For employers, corporation tax savings on the employer’s pension contributions are possible as well as a saving on employer’s NICs. Employers could use the NIC saving to enhance the pension contribution for the employee.

• Start a saving habit for children. Junior Individual Savings Accounts (JISAs) enable parents or grandparents to save up to £4,080 a year, tax-free for each of their children or grandchildren so make sure the maximum contribution is made before 6 April 2016.

• For those children with a Child Trust Fund the same £4,080 limit applies. You can transfer most Child Trust Funds into a JISA and in some cases the fees are considerably less. A child can have only one or the other not both so if in doubt please take advice.

• Think of taking out a stakeholder pension. They allow contributions to be made by, or for, all UK residents, including children. You can make a net contribution of up to £2,880 (effectively, £3,600 gross) each year for members of your family, even for those who do not have any earnings.

• Start as soon as possible. Investing £2,880 per annum from age 10 could build a (2016/17 maximum allowable) pension pot of £1m by their 68th birthday.

• Your children or grandchildren may be looking to get on the housing ladder: you could help fund their ‘Help to Buy ISA’ (see below) and in doing so reduce your Inheritance Tax bill.

• There is one easy tax planning tip you can consider to save your business and family tax. A shareholder /director paid a low salary up to the NIC threshold of £8,060 in 2015/16 and a net dividend of £30,892, could take home £38,952 in 2015/16 with no income tax due assuming they have no other income whatsoever.

• In addition the company could make a pension contribution on behalf of that individual.

• The company receives a Corporation Tax (CT) deduction for the pension payment and pays no employer’s NICs on the total outlay of £18,060, creating a saving of £3,612 per year (assuming a CT rate of 20%).

• These opportunities will not suit all owner managed businesses but could be appropriate for a family member or spouse who holds a small shareholding and works for the business. Ask your Mazars adviser for more information.

Planning with salary

PERSONAL

PROPERTYHelping hand for first time buyers

Second home and buy to lets

Stamp Duty catch!

• Any first time buyer saving for a house needs all the help they can get and the Help to Buy ISA is a good starting point. They allow anyone aged 16 or over, to save up to £200 per month, on top of an initial investment of up to £1,000, towards a deposit on their first property purchase. If an individual saves £12,000, the government will boost those savings by 25% to £15,000 when used for a deposit on the purchase of their first property. In effect the government is giving an incentive of £50 for each £200 saved.

• The tax free bonus will be set at a minimum of £400 and maximum of £3,000 and will be available on all UK properties up to a value of £450,000 in London and up to £250,000 elsewhere. As the Help to Buy ISA is on an individual basis, if a couple saved a deposit of £24,000 equally between them, they would receive an additional £6,000 from the Government. The new account will be available for four years from the launch date, but there is no limit on how long the account can remain open. Each first time buyer can open only one Help to Buy ISA during the lifetime of the scheme.

• For parents with disposable income it might be a good plan to help fund the Help to Buy ISA for their adult child enabling them to build up a nest egg for their first home. This could also improve the parents’ inheritance tax position.

• If you have a second home, and have lived in both, you may be able to save CGT by making an election to nominate which is your main residence. Making an election gives you freedom of choice to choose, e.g. the one you are likely to sell first and/or stands to make the most capital gain.

• If you have moved home and have yet to sell your previous home watch out. If you cannot sell within 18 months the CGT clock will start ticking. But not all of the gain is taxable so seek advice rather than rush through a sale for the wrong price.

• If you let a property and have significant rental profits you can reduce the tax you pay by releasing equity in the property. In certain circumstances, property owners can increase the loan interest for now (see below) as a deduction from the letting profit – giving effective tax relief at the owner’s top rate of tax.

• From 1 April 2017, higher rate income tax relief for interest paid, on borrowings to fund residential property lettings, will be phased out over the course of three years. Holiday lettings are exempt.

• If you are a higher rate taxpayer, with buy-to-let property, you need to consider how this will affect your investment return and take advice on how to mitigate it.

From 1 April 2016, higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of “additional” residential properties (above £40,000), including buy to let properties and second homes. The higher rates will be 3 percentage points above the current stamp duty rates. These new rules will not be finalised before the Budget on 16 March so seek advice if you are considering purchasing such a property, you may wish to accelerate your plans and buy before 6 April 2016.

If you are getting out of the buy to let market take professional advice from your Mazars adviser on how to invest the capital released into an asset that produces a tax free return or a capital only return.

PLANNING FOR A WEALTHY RETIREMENT

Cuts for higher earners

Use it or lose it

Allowance cut

It’s never too late

Inheritance tax savings

In the last few years we have seen so many changes to the pensions landscape offering greater freedom and flexibility than ever before. We have a number of guides and fact sheets covering the details but in planning terms there are a number of things to do before 5 April 2016.

• The annual contribution limit for an individual (the total of personal contributions and those made by an employer) is £40,000, within pension input periods (‘PIP’s) ending before 5 April 2016 and you receive tax relief for the contributions at your highest marginal tax rate.

• However, from 6 April 2016, this will be reduced by £1 for every £2 of ‘income’ if you earn over £150,000 in a tax year, until your allowance drops to £10,000.

• We advise that you consider maximising your pension funding before 6 April 2016. Additionally, this year is a bonanza, one off year as you could get two bites of the cherry by benefitting from an extra allowance of £40,000, allowing you to make pension contributions of up to £80,000: And don’t forget you can still get 45% tax relief on pension contributions. The rules are complicated so please ask us for guidance.

• From 6 April 2016 the pension lifetime allowance “LTA” (the amount you can put in a pension over your lifetime) is to be cut from £1.25M to £1M. Shaving £250,000 off the LTA could see a tax charge of up to £137,500 for you if you have pension funding in excess of the reduced limit and don’t do something about it. The Government has introduced easing measures called “protection” and these are available to prevent you being hit with a tax charge. But this is very complicated so if you are;

• Someone with a pension pot already above £1M,

• Someone with a pension pot at risk of exceeding £1M at retirement, even if pension saving stops now,

• Someone with a pension pot at risk of exceeding £1M at retirement if pension savings continue… then you must take advice before the tax year end.

• If you have not made contributions up to the limit in 2012/13, 2013/14 and 2014/15 then the unused relief may be available for carry forward into 2015/16. However, you must have been a member of a registered pension scheme in the tax year giving rise to the unused relief and any contributions made in the year reduce the amount available to bring forward.

• So depending on your past contribution pattern, it is theoretically possible to contribute up to £220,000 before 6 April 2016 and obtain tax relief up to £99,000 on the whole sum. Using a self-invested personal pension can also give you control over how your pension pot is invested.

• A pension contribution paid before 6 April may reduce both your tax bill for 2015/16 and your payments on account for next year.

• It really is never too late to start saving into a pension. For example a 50 year old business owner, with no pension whatsoever intends to retire at 65. His income for pension purposes is under £150,000 (see above). If his company pays in the maximum amount of £3,333 per month on his behalf (£40,000 limit per annum) then the fund could be worth £681,872 when he retires (assumes 5% annual investment growth and 2.5% inflation).

• At the moment when someone aged 75 or over dies the fund can be bequeathed to anyone with a one off tax charge of up to 45% or the recipient can take income and pay tax at their marginal rate, a significant reduction from the old 55% rate.

• From 6 April 2016 the individual inheriting the pension fund will pay tax at their personal marginal rate on any money withdrawn from the pot. In effect a tax rate of 45% could be replaced by one as low as 20% or even nothing if their income is covered by their personal allowance.

• If the owner of the pension pot dies before they are 75, the funds can pass to the beneficiaries, tax free whether the fund has been touched or not.

• Consider maximising your pension contributions, rather than giving cash away to avoid IHT. This gives you the advantage of reducing your estate through “regular expenditure out of income” (see next page) and keeping funds should you need to draw on them later.

INHERITANCE

Where there’s a Will…

A matter of trust

• You can make gifts up to £3,000 each year, free from IHT. You can also use any unused allowance from the previous year. You can make as many gifts of up to £250 each as you like to other recipients as well as gifts on marriage.

• Regular gifts that are ‘normal expenditure out of income’ may be made IHT free. Make sure to plan and document that you are making regular gifts that will not reduce your normal standard of living and don’t depend on you depleting your capital. Take advice before embarking on this plan to ensure those gifts are free from IHT.

• Make IHT free investments. If you own a business or invest in unquoted trading companies, you may be entitled to IHT business property relief (BPR).

• Investments based on property hardly ever qualify for BPR: buy-to-lets are a prime example. So it may be worth reviewing your investment strategy to see if you might be better off switching to assets that do get BPR or agricultural property or forestry relief. There may have to be a trade-off between the investment returns and the potential for saving IHT but we can help you cover all the bases.

• Over half of the adult UK population has no Will and many old Wills written a while ago may not incorporate changes in tax and inheritance rules. Make writing or reviewing your Will a priority. If you do not leave a Will the intestacy laws may dictate how your assets are distributed to your family without reference to your wishes. A good Will should minimise tax and give your family flexibility and protection and may even let them save tax in future.

• If you already plan to make substantial gifts to charity you can either make lifetime gifts that save tax at your top income tax rate or include them in your Will. If you leave at least 10% of your net estate to charity your executors will only have to pay a reduced rate of IHT of 36% (rather than 40%).

• In many family circumstances the use of a formal trust can help you protect and enhance your family’s future finances.

• Appointing trustees to manage assets on your behalf can have both practical and tax advantages as well as ensuring that family assets are protected after your death (both in the UK and overseas).

• The timing of creating a trust can have significant tax implications so, if you have long term financial goals, the sooner you seek expert advice on your options the better. If you have already set up one or more trusts take advice before adding any property to them.

If you have already settled one or more trusts take advice before you add any more to those trusts as there are potential tax implications.

You can’t take it with you!

SAVINGS & INVESTMENTSTax free savings!

What a relief!

£1,000 tax free

The ISA was given a complete overhaul nearly two years ago and it is one of the most tax efficient savings vehicles available.

• The investment limit for 2015/2016 is £15,240 per annum and you can split the amount you pay into a ISA between a Cash ISA and a Stocks and Shares ISA.

• ISAs are flexible enough now for all life events. For example if you have a young family, having instant access to cash will be key. Whereas someone a few years from retirement will want to be able to protect their funds from the ups and downs of the financial markets: they can now move their funds between stocks and cash. Your Mazars adviser can advise the right mix for you and your family.

• Widows and widowers can now inherit their spouse’s ISA allowance. Previously ISAs lost their income tax and CGT-free status on death so income and any rise in value would be taxable after the date of death. Like any other asset inherited by a surviving spouse, they are free from IHT on the first death but IHT will be charged on the death of the surviving spouse.

• If you’re an ISA saver, from 6 April 2016, you will able to dip into your savings and replace them without it affecting your annual subscription limits. The new contributions would have to be paid within the same tax year as the withdrawal for it not to be counted.

• But never simply withdraw your money from an investment ISA and pay it into a cash ISA. Doing so will cancel the tax free benefit.

• From 6 April 2016 the first £1k of interest will be tax free (£500 for higher rate taxpayers). Interest will also be paid gross so that non-taxpayers no longer have to reclaim tax deducted at source. Additional rate (45%) tax payers will not benefit from this new allowance.

• There are attractive income tax reliefs (of between 30% and 50%) available for investments in Venture Capital Trusts (VCT), Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS). Individuals can get up to £60,000 income tax relief via a VCT, £50,000 from a SEIS or £300,000 from an EIS or Social Investment Tax Relief (SITR). The SITR offers tax incentives for investment in shares or loan instruments issued by social enterprises.

• Everyone has a Capital Gains Tax (CGT) free allowance of £11,100 in 2015/16. If you haven’t realised gains of this amount, take a look at whether assets can be sold before 6 April 2016. If you have used up your allowance, consider deferring selling assets until the next tax year. If your spouse is not a higher rate income tax payer, gains on assets transferred to them will only pay the 18% lower CGT rate to the extent of their unused income tax basic rate band.

• If you have substantial investments, take advice to see if it is possible to restructure them so that they produce either a tax free return or a return of capital taxed at a maximum of only 28% under CGT, rather than income tax at up to 45%.

Coming or going?

OVERSEAS• Leaving the UK? If you are planning to leave the UK and giving up UK residence

for tax purposes, you will need to plan this carefully as giving up UK residence is not always straightforward.

• Planning to find work abroad? If you are planning to take up residence abroad be aware that leaving the UK takes effect for income tax purposes immediately. But there are anti-avoidance rules designed to catch capital gains and some forms of income, if you do not spend five full years non-UK resident. Income and gains caught by these rules are treated as arising on 6 April after you resume UK residence.

• Living in the UK? If you are not UK domiciled, you will only benefit from the remittance basis if your unremitted overseas income and gains are less than £2,000 or you make a claim.

• From 2015/16 non-domiciles who choose to use the remittance basis and have been resident for at least 7 of the past 9 years will pay an annual charge of £30,000. The charge on a non-domicile who has been resident for 12 out of 14 years, currently £50,000, will be increased to £60,000 for 2015/16.

• Those resident 17 or more of the last 20 years will pay an annual charge of £90,000 to use the remittance basis in 2015/16 and 2016/17.

The rules on domicile change from 6 April 2017. Anyone who has been UK-resident for 15 out of the 20 preceding years will be deemed to be UK-domiciled for all tax purposes. If you are not yet UK-domiciled but have been resident here for over 13 years and intend to remain in the UK, you should seek advice.

These rules are complicated so do take advice if any of these circumstances are applicable to you.

Use our checklist to make sure you are making the most of reliefs and allowances before the 2015/2016 tax year ends on 5 April 2016.

CHECKLIST

1. Have you used your full ISA allowance of £15,240 for 2015/2016?

2. Have you used your full Junior ISA allowance of £4,080 for

2015/2016?

3. Can you restructure your salary, dividend and pension position?

4. Have you contributed the maximum amount (£40,000) to a pension

plan in 2015/2016 and utilised your carry forward relief?

5. Have you used your full allowance for EIS (£1 Million), VCT

(£200,000) and/ or SEIS (£100,000)?

6. Have you and/or your spouse/civil partner used your full annual

CGT exemption for 2015/2016 (£11,100)?

7. Have you used your annual IHT exemption (£3,000) for 2015/16

(and 2014/15)?

8. Do you have an up to date Will?

9. Get a pension check to protect your fund if it is likely to exceed £1m

The information contained in this document/presentation/factsheet does not constitute individual advice. Mazars Financial Planning Ltd will not accept any responsibility for decisions taken or not taken on the basis of the information presented. Always obtain independent, professional advice relevant to your own circumstances.

Any reference to legislation and tax is based on Mazars Financial Planning’s understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.

Mazars Financial Planning Ltd is a wholly owned subsidiary of Mazars LLP, the UK firm of Mazars, an integrated international advisory and accountancy organisation.

Mazars Financial Planning Ltd is registered in England and Wales No 3172233 with its registered office at Tower Bridge House, St Katharine’s Way, London E1W 1DD.

Mazars Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.

© Mazars LLP 2016-02 32228

www.mazars.co.uk

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