These are tough times for taxpayers, with Boris Johnson unleashing a new 1.25 per cent National Insurance levy and hiking the dividend tax on shares. This follows Sunak’s brutal Budget in March, when he froze income tax, capital gains tax and inheritance allowances for five years, which will steadily drag more taxpayers into the net. The following five steps could help keep HM Revenue & Customs (HMRC) at arm’s length.
1. Make gifts to cut inheritance tax. Reduce any future inheritance tax (IHT) liability by making gifts to loved ones.
You can gift a maximum £3,000 with no IHT to pay, and mop up any unused £3,000 allowance from last year.
Laith Khalaf, head of investment analysis at AJ Bell, said gifts of up to £5,000 to a child who is getting married are free of IHT, or up to £2,500 for grandchildren and £1,000 for anybody else. “So are gifts made out of ‘normal’ income provided they do not affect your standard of living.”
You can make further IHT-free gifts of up to £250 per person, provided the beneficiary has not benefited from another exemption.
All other gifts are only completely free if you live for seven years, under potentially exempt transfer rules. “The tax works on a sliding scale, falling to just 8 per cent after six years,” Khalaf said.
2. Max out your Isa allowance. Each tax year, everyone can invest up to £20,000 in cash or stocks and shares, and take their returns free of income tax and capital gains tax.
Shares held in an Isa will escape last week’s dividend tax hike, charged on dividends above £2,000 a year from next April.
You can shift existing shares or funds inside your tax-free allowance by using something called “bed and Isa”, effectively selling them and buying them again inside an Isa, said Darius McDermott, managing director of Chelsea Financial Services. “Use your annual £12,300 capital gains tax allowance to take your gains free of tax.”
Savers aged between 18 and 39 who are saving to buy a property should consider investing in a Lifetime Isa.
The Government offers a 25 percent top-up on contributions of up to £4,000, giving a maximum £1,000 bonus a year.
Parents and grandparents should not forget Junior Isas, which allow families to save or invest £9,000 a year for children free of tax.
3. Plan for capital gains tax raid. Many expect Sunak to increase capital gains tax, which you pay when you sell assets at a profit, including shares and other investments held outside of an Isa, as well as paintings, antiques, jewellery, and investment property.
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Currently, basic rate taxpayers pay CGT at 10 percent, rising to 20 percent for higher-rate taxpayers. These rise to 10 percent and 28 percent when selling an investment property or second home.
CGT could even be brought into line with income tax, which would see higher earners could pay 40 or 40 per cent tax.
Tax advisors already report clients racing to sell high value assets ahead of any CGT hike, so now it may be a good time to bring forward any sales you have been planning.
CGT is complex, though, so seek advice.
4. Claim pensions tax relief. Offering tax relief on pension contributions costs the Treasury a thumping £40 billion a year. That makes it a tempting target for the Chancellor, said Steven Cameron, pensions director at Aegon.
You can invest up to £40,000 a year into a pension and claim tax relief, and now could be a particularly good time for higher-rate taxpayers to do so. “Take advantage while they can, just in case tax relief is cut at some point,” Cameron said
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Basic rate taxpayers claim relief 20 percent relief, which increases an £80 contribution to £100. Higher-rate taxpayers get 40 percent relief, so £100 in their pension pot only costs £60. Use it while you still can.
5. Use your partner’s allowances. Married couples and those in civil partnerships can pass assets between each other free of tax and should take this opportunity to double their tax savings.
For example, if you expect to make a large capital gain, say, from selling property or shares held outside of an Isa, use both your annual £12,300 exemptions.
Or you could double up on your inheritance tax gifting allowances, and also use any unused £3,000 gift allowance from last year.
Doubling up Isa allowances gives couples the chance to shift £40,000 out of HMRC’s clutches each year.
With the Government hunting for every opportunity to raise money, you can’t afford to waste time.
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