Apex Group Spring budget pre-tax year end insights
The UK tax year for individuals ends on 5 April 2023,the following actions should be considered, where appropriate, in order to maximise available relief for tax efficiency before year end.
Read our latest insights covering some potential actions for all individuals, and (particularly where investments are concerned). Kindly note that professional advice should be sought. Individuals who are also subject to US Federal tax should be aware that not all the relief elements below will be effective.
Rates and allowances
The personal allowance for the 2022/ 2023 tax year is £12, 570. The allowance is reduced by £1 for every £2 of income above £100, 000, such that it is reduced to zero where income exceeds £125, 140. As a result, the effective rate of tax on income between £100, 000 and £125, 140 is 60%. This means that the effective rate of tax relief on pension contributions and charitable donations via Gift Aid is 60% for those whose income falls within this range. Affected individuals should consider making pension contributions and/or Gift Aid Donations to mitigate the impact of the tapering of the personal allowance. Further notes below on pensions is included below.
Individual savings accounts (ISAs) may be an efficient investment for higher-rate taxpayers to consider. The maximum allowance is £20, 000 per tax year. You need to save or invest by 5 April for the allowance to count for that year and if you don’t use the allowance, it will be forfeit. Any growth within the ISA – both in terms of income and capital gains – is tax-free, and the funds can be withdrawn at any time. There is however no tax relief on the initial investment.
Individuals looking to reduce their tax liability may wish to consider making tax-geared investments via the Enterprise Investment Scheme (EIS), the Seed EIS (SEIS), Venture Capital Trusts (VCT) or Social Investment Tax Relief (SITR). It should be noted that the following does not constitute investment advice; you should seek independent advice from an IFA if you are considering making investments via these schemes. The EIS and SEIS in particular carry a high risk, and this should be borne in mind when considering the balance of your investment portfolio.
The Enterprise Investment Scheme (EIS):
- Income tax relief at 30% is available to set against your tax liability for the tax year of investment, or the previous tax year (i.e. 2021/ 2022 for investments made before 5 April 2023). You can invest up to £1 million each tax year or up to £2 million if you invest in knowledge-intensive companies (broadly these are early-stage businesses engaged in scientific or technological innovation). The shares must be held for a minimum of three years, or the 30% investment relief will be clawed back by HMRC.
- If you sell your EIS shares for a profit after the three-year qualifying period, the upside is exempt from Capital Gains Tax (CGT).
- Losses on EIS shares (net of income tax relief given and not withdrawn) can be offset against gains or, alternatively, against general income in the tax year of disposal or the preceding year.
- Inheritance Tax Relief (via Business Property Relief) should be available for EIS shares provided they are held for a period of two years.
- As an additional (optional) relief, capital gains arising on disposals of other assets may be deferred by reinvesting those gains in a subscription for qualifying EIS shares. The investment in EIS shares must be made for the period beginning one year before and ending three years after the disposal. The deferred gains will recrystallise when the EIS shares are disposed and will be subject to CGT at the appropriate rate for that specific year. If capital losses have been realised in the intervening period, these may be available to offset against the deferred gains.
The Seed EIS:
- The Seed EIS offers relief for investors who subscribe for shares in small start-up companies. Currently, the maximum qualifying investment is £100, 000 per tax year (rising to £200, 000 from 6 April 2023). Income tax relief is given at the rate of 50% of the sum invested, and relief may be given against tax in the tax year the investment is made or the previous tax year. As with the EIS, the shares must be held for a period of three years, or the investment relief will be clawed back.
- Gains on the disposal of SEIS shares are exempt from CGT if they are held for three years. A loss on disposal of SEIS shares can be set against other gains.
- SEIS shares benefit from Inheritance Tax Relief if held for two years.
- If you dispose of another asset at a gain and re-invest all or part of that gain in shares which qualify for SEIS relief, half of the gain re-invested may be exempted from CGT.
Venture Capital Trusts (VCT):
- VCTs are listed companies, similar to investment trusts.
- Investors can claim income tax relief at 30% of the amount subscribed, up to a maximum of £200, 000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief.
- Dividends received on VCT shares are exempt from income tax, and gains on VCTs are exempt from CGT.
Social Investment Tax Relief (SITR):
- SITR is a mechanism to help raise capital to support the trading activity of a community investment company or charity.
- You can invest up to £1 million a year in qualifying shares or loans in SITR-qualifying enterprises; income tax relief is available at 30% of the amount invested. There is a three-year qualifying period for these investments.
- Gains on SITR investments are exempt from CGT, and losses may be set against income or capital gains.
- Capital gains on other assets may also be deferred by SITR investments, similar to EIS deferral relief.
- Most individuals may contribute up to £40, 000 to their pension in each tax year, and can also augment these contributions with any unused annual allowances from the preceding three tax years provided they were a member of a qualifying pension scheme.
- High income earners should be aware that the standard annual allowance of £40, 000 for pension contributions is reduced by £1 for every additional £2 of an individual’s ‘adjusted income’ over £240, 000 and can still affect you if your income from all sources is over £200, 000. Affected individuals can see their annual allowance reduced to as low as £4, 000.
- Should you wish to contribute the maximise to your pension relief, you should be careful to take account of both employee and employer contributions, as well as Self-Invested Personal Pension (SIPP) contributions from net income.
- If you own your own business, consider making an employer contribution to your pension as this will be an allowable deduction for corporation tax, but you will not be subject to income tax.
- Contributions in excess of your available allowances will be subject to an annual allowance income tax charge at a marginal rate of tax and will need to be declared in your tax return.
- Although funds invested within a pension can grow tax free, there is a limit, the Lifetime Allowance (LTA), on the total amount you can hold in a pension pot. Funds in excess of the limit will be subject to penalty tax charges of up to 55% when you start to take pension benefits.
- The LTA was reduced from £1.25 million to £1 million as from 6 April 2016. You can elect for ‘Individual Protection 2016’ (IP16) to preserve your individual LTA at the lower of £1.25 million or the actual value of your pension funds on 5 April 2016 (if they were above £1 million on 5 April 2016). If the total value of all your pension funds is likely to be at or near £1 million by the time you retire, you should seek advice.
- As with previous reductions, individuals can also preserve the earlier £1.25 million LTA by opting for ‘Fixed Protection 2016’ (FP16), provided no contributions have been made since 6 April 2016.
- Stakeholder pensions allow contributions to be made by, or for, all UK residents, including children and grandchildren from birth.
- You can make a net contribution of up to £2,880 (£3,600 gross) each year for members of your family, even for those who do not have any earnings.
Capital Gains Tax & Inheritance Tax
The 2022/ 2023 capital gains annual exemption is £12, 300. This will reduce to £6,000 for 2023/ 2024 and to £3,000 for 2024/ 2025. You may wish to take advantage of this year’s £12, 300 exemption by realising gains prior to 6 April 2023 where possible, as they cannot be carried forward to later years. Note that under the ‘bed and breakfast’ rule, a gain or loss does not crystalise for tax purposes if you sell shares and repurchase the same shares within 30 days; you can however repurchase the same shares through an ISA.
Family Investment Companies (FICs)
FICs can be a useful way to protect family wealth, as an alternative to a trust. The most appropriate structure will depend on the family’s circumstances and objectives. FICs are structured as private companies whose shareholders are family members, enabling individuals to retain control over assets while accumulating wealth in a tax-efficient manner, as well as facilitating future succession planning. You can settle funds in the FIC in the form of interest-free loans or by subscribing for preference shares. This will not be regarded as a transfer of value for inheritance tax purposes and these funds can be extracted from the company at a later date tax-free.
Where the company makes profits and gains these will be subject to corporation tax, although dividend income will be exempt from tax. The rate of corporation tax will rise from 19% to 25% in April 2023, where company profits exceed £250, 000. A lower rate of 19% will continue to apply where company profits are not more than £50, 000. Even with the upcoming corporation tax rate rising, in most cases this will still be lower than if the investments had been held directly or via a trust. The trust will be subject to tax at 40% or 45%, and CGT at a maximum of 28%.
Shareholders in a FIC will only pay tax when the FIC distributes income, or if it is wound up. The FIC can therefore be used to accrue profits retained in the company until required in future years when the individual’s personal tax rate may be lower. Any investment gains and income could also potentially be paid into a pension plan for the benefit of the shareholders; it is however recommended that parties to an FIC receive independent financial advice if this is considered as an option.
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