Year-end tax planning before 5 April 2021

The end of the current 2020/21 tax year is approximately one month away now (5 April 2021). For many people, there is action which they may be able to take in the meantime, and it could be worth considering some of the general points highlighted below as time is of the essence.

ISA annual allowance

The annual ISA allowance for 2020/21 is £20,000 per UK resident adult, which can cover the addition of cash and/or shares into a person’s ISA. The transfer into an ISA is tax-free, and any income or capital growth achieved thereafter, is free from income tax and capital gains tax (CGT). However, any unused allowance of that £20,000 is lost – it cannot be carried forward to 2021/22 or transferred to another person.

Some ISA’s may come with conditions such as when withdrawals can be made. Therefore, it is important to consider them with care before investing.

For the younger generation, Junior ISA allowance is £9,000 and funds cannot be withdrawn from until the child is 18.

CGT annual exemption

The annual CGT exemption for 2020/21 is £12,300 per individual. This represents the amount of capital gains which an individual can generate in 2020/21 (net of capital losses generated in 2020/21) without incurring a CGT liability. However, any unused exemption is lost so that it cannot be carried forward to 2021/22 or transferred to another person.

That said, assets can be transferred between spouses without realising a capital gain (the gain, or loss, remains unrealised). So if one spouse has an asset which they would like to realise a gain on, and the other spouse has available annual exemption, consideration should be given to transferring some or all of that asset to the other spouse first to make use of their annual exemption where possible.

Pension contributions

Pension contributions can attract income tax relief. Each individual will have an annual allowance for 2020/21 of between £4,000 and £40,000 – the exact amount can vary between individuals because it is linked to their level of income. Broadly speaking, for every £2 of 2020/21 income an individual has above £240,000 (which includes any tax-free pension contributions made by their employer), their £40,000 maximum allowance is reduced by £1 (down to a minimum of £4,000).

Unused annual allowance can be carried forward for up to three years. Potentially, someone could have a total allowance available to them in 2020/21 of £160,000. With this in mind, any unused allowance from 2017/18 will be lost if not utilised in 2020/21.

Charitable donations (cash only)

Making a cash donation to charity, and claiming gift aid on those donations, can also attract income tax relief. For every £1 which is donated to charity (this being the 80p cash donation plus the 20p gift aid claimed), £1 less of that person’s income will be taxed at the higher or additional tax rate.

Basic rate tax continues to apply and therefore, no income tax relief is available to basic rate taxpayers, although the charity still benefits. Furthermore, non-taxpayers could incur themselves a tax charge by claiming gift aid, due to the need for them to fund that gift aid claim.

Income tax relief can also be available for non-cash donations; however, this works in a different way. Please see our blog here for further information on charitable donations.

Personal allowance restoration

Making pension contributions and/or charitable donations can, for some individuals, have a secondary benefit. Every individual is entitled to a personal allowance, this being an amount of income which a person can earn before they have to start paying income tax. For 2020/21 the amount is standard amount £12,500.

However, where a person has income in excess of £100,000, they lose £1 of their allowance for every £2 which they exceed £100,000. As there is no minimum, anyone with income of over £125,000 will have no personal allowance for 2020/21.

Importantly though, when calculating the amount of income which a person has, any pension contributions and/or charitable donations can be deducted. Therefore, if you have an income in excess of £100,000, you should consider making pension contributions and/or charitable donations in order to partially or fully restore your personal allowance for 2020/21.

Inheritance tax (IHT) annual exemption

Every individual can make gifts of up to £3,000 each year without incurring any IHT (whether immediately or in the future). If gifts in excess of this amount are made, only the first £3,000 will qualify.

Any unused exemption can be carried forward for one tax year only. Therefore, an individual could have up to £6,000 available in 2020/21. This also means that any unused exemption from 2019/20 will be lost if not utilised in 2020/21.

There are other exemptions which can apply in certain circumstances. Where that is the case, those exemptions will take priority – thereby preserving the annual exemptions for gifts which would not otherwise be exempt.

One such alternative exemption is spouse exemption. This potentially gives the opportunity to utilise a spouse’s otherwise unused annual exemption, by transferring assets to them (to be covered by spouse exemption) and letting them make the gift(s).

These are all issues that can be discussed as part of your estate and tax planning for the future and the Private Wealth team are here to help you achieve the best possible outcome.

If you would like further advice on tax planning, please contact the Private Wealth team at Moore Barlow.

Please note that the below does not constitute full and complete tax or financial advice. Moore Barlow does not accept any responsibility for actions which you take without seeking our advice first. We are unable to provide professional financial or investment advice. As in respect of that, you would need to seek a financial advisor.