Myron Jobson, senior personal finance analyst at Interactive Investor, is warning that Britons face “a bitter cocktail of tax rises and public spending cuts” on October 30 and should take evasive act today.
Taxpayers have to try every trick in the book, he says. “Taking advantage of both well-known and lesser-known methods can make a significant difference.”
Inheritance tax (IHT) may be a target and Jobson said the simplest way of reducing a potential bill is to give your money away while alive rather than leave it for HMRC. “Each year you can give away £3,000 tax free and make as many gifts of up to £250 to others as you like.”
You can also give a child £5,000 free of IHT on marriage, £2,500 to grandchildren or great grandchildren, and £1,000 to anyone else. “Further gifts are considered potentially exempt transfers, so you must survive seven years before they are totally tax free.”
One lesser-known option allows you to give away as much as you like to a loved one free of IHT, by making regular gifts out of normal expenditure.
These gifts can become instantly IHT-free so long as payments are regular and affordable from your income, without dipping into capital, Jobson said. “This can be a game-changer but sporadic gifts are unlikely to pass muster.”
This can be a brilliant option if you have enough income, but many have never heard of it. To make it watertight, you need to keep detailed records of their income, outgoings and gifts.
Capital gains tax (CGT) is a likely Reeves target in a blow to those with gains on property, non-Isa shares, antiques or a business.
Jobson urged people to realise smaller gains every year, staggering sales to make full use of your £3,000 annual exempt amount for CGT.
Married couples and civil partners can pass assets to each other free of CGT, allowing them to double up their annual exempt amounts. They can shift assets into the name of the lower taxpayer before selling.
So if a 45% taxpayer is registered as the owner of the asset they could potentially pass it to their spouse or civil partner who only pays 20% tax.
If done properly, the CGT bill should fall but anyone who does this must accept their partner will become the new owner, and can do what they want with the asset. So make sure you trust them.
These tax moves are complicated and it’s important to get them right, so it’s worth taking tax planning advice. This should more than pay for itself. Especially today.
Remember to make use of any capital losses, too. For example, if a property or shares have fallen in value. “If you have £10,000 in gains and £3,000 in losses, you only need to pay tax on £7,000,” Jobson said.
You don’t have to report losses straight away but may claim up to four years after the end of the relevant tax year, via self-assessment.
When selling a second home or buy-to-let, remember that you can deduct expenses such as stamp duty, estate agency fees and conveyancing charges from the total profit. So rustle up those receipts.
If you have made upgrades to the property that have increased its value, such as an extension, you can deduct the cost from your taxable gain. However, you can’t claim for routine maintenance, or like-for-like replacement of a bathroom or kitchen with one of roughly the same value.
You can cut your tax bill when making charitable donations, too.
Higher-rate taxpayers should complete a Gift Aid declaration when giving to charity, Jobson said. “Gift Aid lets the charity reclaim 25p on every £1 donated, and higher-rate taxpayers can claim back the difference between basic and higher rate of tax via self-assessment or by contacting HMRC.
All capital gains, dividend income and savings interest are tax free for life inside an Isa, and Jobson urged taxpayers to use their £20,000 allowance. “The tax advantages are automatic.”
Investors with non-Isa shares or funds can sell some of them every year using their £3,000 annual exempt amount to avoid paying any CGT, then buy them back inside an Isa where they will be tax free for life. This process is known as Bed & Isa.
More experienced investors could consider saving either via a Venture Capital Trust (VCT) or the Enterprise Investment Scheme (EIS), which are government-backed schemes designed to encourage investment in smaller UK companies.
Benefits include 30% income tax relief and exemptions on capital gains. However, they are too risky for most people, who should stick to their Isa allowance.
Reeves may potentially slash higher rate tax relief on pension contributions, reducing it from a maximum of 40% or 45% today, to a flat rate of just 25% or 30% for everyone.
Higher earners should consider contributing at today’s full rate just in case. They can invest up to 100% of their income each year, to a maximum of £60,000 under the pension annual allowance.
They can also carry forward unclaimed annual allowance from the previous three years.
However, basic rate taxpayers who only get 20% tax relief on pension contributions today are in a different position. They could potentially get up to 30% tax relief after the Budget so should consider delaying any contributions. It’s a tough call until we know for sure what Reeves will do.
Jobson said many employees overlook salary sacrifice schemes. “By giving up part of your salary for benefits like increased pension contributions or a cycle-to-work scheme, you can lower your taxable income.”
The Trading Allowance allows everyone to earn up to £1,000 a year from property or a side hustle free of tax.
The Marriage Allowance can save married couples and civil partners up to £252 a year, provided one partner is a 20% taxpayer and the other earns below the £12,570 personal allowance. You can potentially backdate claims to April, 5 2020, if eligible in that time.
There may be more tax-saving options out there, so don’t hang around. Do your research and use every one you can.
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