Many major events may be being postponed because of coronavirus but the tax year will not be one of them. There are several actions many of us need to at least consider before midnight on April 5th.
The annual ISA allowance is £20,000 per person. It has not risen since 2017/18. Had it done so it would have been nearer £21,500 now, but it is still generous. With markets this tumultuous you may want to hold off investing in risk assets, like equities, but you can still put your money into a cash ISA and then transfer into equities later.
Remember Warren Buffett’s advice to be greedy when others are fearful. You will probably achieve the best returns if you invest when you feel least comfortable doing so. If this is too painful, consider setting up a standing order to invest next year’s allowance in regular instalments over the 12 months. This takes away the stress of trying to time the markets. Over the year, the average price you pay will be less than the average price of units overall. This is a phenomenon known as pound cost averaging.
You cannot carry any unused ISA allowance forward so this is a ‘use it or lose it’ allowance.
If you have existing assets – like equities or funds – sitting outside an ISA and are unable to use all your allowance this year, think about how you might wrap them up within an ISA. It is worth making the most of the ISA perks – gains are free of tax and you are saved the hassle of reporting them on your tax return.
Unfortunately, you will have to sell these assets first, which may trigger Capital Gains Tax (CGT). You can then repurchase the same investment – or buy something different – within an ISA. Be careful though – when markets are this volatile, any time out of the market can be costly.
You can also “Bed & Spouse”, which means that you can sell investments held outside your ISA and rebuy them in an ISA in your spouse or civil partner’s name to make the most of their ISA allowance.
Children cannot own shares except through a Junior ISA (JISA) or a pension, which has to be opened by the parent or guardian. You can invest £4,368 in a JISA and the money is locked in till the child is 18, at which point they can take control of it. From April this will rise to £9,000. You may want to set up a standing order for next year’s JISA contributions and start investing regularly.
Most of us can save up to the Annual Allowance of £40,000 gross into a pension. For every £1,000 you invest your pension provider will claim back basic-rate tax at 25% from HMRC and add this to the pot. The effect is that if you pay £80 into your pension it is grossed up to £100. Higher-rate and additional-rate taxpayers can claim back the further 20% or 25% tax they paid when completing their tax return, which usually comes as a reduction in their income tax bill. Many forget to do this, potentially losing thousands of pounds a year.
For high earners who are not close to breaching the £1,055,000 Lifetime Allowance (which rises to £1,073,100 in 2020/21), there is much to be said for pumping as much as you can into your pension. Those earning over £100,000 should particularly consider this. For every £2 you earn over £100,000 you lose £1 in the personal allowance. As a result, your marginal rate of tax between £100,000 and £125,000 is 60%. Putting that money into a pension is effectively saving you £15,000 in tax.
If you have not maximised your pension contributions in the past three years, you can carry forward the unused allowance into this year.
There are several caveats. Perhaps the most important is the tapered allowance trap. This reduces your pension contributions allowance by £1 for every £2 that your income – which includes earnings, rental incomes and other investment income – takes you over £150,000 (£240,000 in 2020/21). It can get fiendishly technical but the tax benefits of paying into a pension and exploiting carry forward can be so substantial that it is worth taking professional advice and soon.
You can also make contributions of £3,600 into a pension scheme for a spouse, civil partner or child if they have no earnings of their own and still enjoy the basic rate of relief. So if you contribute £2,880, HMRC will top it up to £3,600.
Capital Gains Tax (CGT)
We each have a CGT allowance of £12,000. Higher-rate taxpayers pay 20% on gains over the allowance. For basic-rate taxpayers, it is just 10% – though gains on property other than the primary residence carry an extra 8% tax. So if you have £50,000 worth of shares that you bought a decade ago for £10,000, the gain is £40,000. Your £12,000 CGT allowance means you will pay tax on just £28,000 – at 10% or 20%.
You can gift assets to a spouse or civil partner, without triggering CGT. They can then sell some too and, assuming they are not using their allowance with disposals of their own, you have effectively doubled your CGT allowance. In our example, it would mean only £16,000 is liable for CGT. Gifting is particularly useful if your partner pays tax at a lower rate.
Of course, you do not have to dispose of assets all in one go. You might sell up to the limit of your CGT allowance, and then sort the remainder after April 5th when you have a fresh allowance. The allowance rises to £12,300 in 2020/21.
Giving money away
If you pay sufficient tax and donate to registered charities using gift aid, the charity receives a 25% uplift on your donation. On top of that, higher-rate (40%) taxpayers and additional-rate (45%) taxpayers can claim back the difference between the basic rate of tax and the tax they paid (20-25%) – usually by reducing their income tax bill.
You can carry back donations to the previous tax year, which is useful if the top rate of tax you paid in that year was higher.
You can also give money to your family and reduce your Inheritance Tax (IHT) liability. Each of us has an “annual exemption” that means you can give away up to £3,000 in a tax year. You can exceptionally carry forward the allowance for one year. (So a couple who have not used the exemption in the previous year can give £12,000 in one go.)
In addition, you can give as many gifts of up to £250 per person as you want during a tax year as long as you have not already used another exemption on them.
This is a useful way of drip-feeding money down the generations over time without risking running short yourself.
Consult and review
There will be another budget in the Autumn. By then we expect the coronavirus threat to be diminished and for the new Chancellor to have had some time to consider other issues. We might expect him to turn his attention to pensions, IHT and even CGT. He may well need to raise taxes. While we discourage people from letting the tax tail wag the investment dog, we do encourage them to use what benefits are available, while they are available and where sensible. Take advice and review your finances at least annually.
Posted on 19th March 2020
This is not advice and you should not act on the content of this comment without taking professional advice. Opinions and views expressed are personal and subject to change. No representation or warranty, express or implied, is made or given by or on behalf of the Firm or its partners or any other person as to the accuracy, completeness or fairness of the information or opinions contained in this document, and no responsibility or liability is accepted for any such information or opinions.