Let’s start with Capital Gains Tax (CGT).
Every taxpayer currently receives an exemption of £11,700 in the tax year – so it makes sense to realise what tax gains you can take advantage of up to this limit before it’s lost after 5th April 2019. Last year, nearly £7.8 billion was paid in CGT, so it’s certainly worth looking for opportunities to place assets into wrappers, such as pensions and ISAs, to provide a shelter from further tax.
Is your spouse using their allowance? If not, you can transfer your assets across, giving you the ability to raise your gains to £23,400 between you. This method is not subject to CGT making it easier for you to complete.
Although it was cut in April 2018, the Dividend Allowance enables investors to receive tax-free dividends of £2,000 during this financial year. It comes with a reduction that emphasises the importance of tax-efficient ISAs and pensions, and is still worth ensuring that income-generating assets held outside of these wrappers is split between spouses to make the most of combined allowances.
Now, let’s take a closer look at Inheritance Tax (IHT).
For many families this can be a major worry as they work on their estate planning. In 2018, a record £5.2 billion in IHT was collected, and the HM Treasury expects revenues to rise by a further 25% over the next five years.
We all know that IHT is viewed as an unfair tax, one which even the Chancellor agrees is complex, but when it comes to the crunch, it’s generally a lack of willingness and ignorance that are to blame for wealth ending up with HMRC, rather than in the hands of loved ones. More than half of people don’t know the rate at which assets above their nil-rate band are taxed, and more than a third of over-55s say that they find the subject of inheritance too difficult to talk about with their loved ones.
Don’t worry though, there are plenty of steps those with a sizeable estate can take to keep any potential IHT bill to a minimum. Each tax year you can make gifts up to £3,000 that will be immediately free of IHT, and you can carry forward any unused gifting allowance from the previous tax year, although this opportunity will be lost if you don’t make the most of it by the end of the financial year. This means that a couple could potentially remove £12,000 from their estate immediately.
You are also able to make contributions into a Junior ISA or to a pension for younger family members, but if you want to give away larger sums, you must live for seven years from the date of the gift for it to remain free of IHT. On the other hand, you can make any number of small gifts worth up to £250 each, without paying a penny of IHT. Regular gifts from income are also free of this tax, as long as you can demonstrate that giving this money away did not affect your standard of living.
There you have it, some top tips to helping you understand more about your tax allowances.
Another thought for helping you prepare your finances, why not review your Will to make sure everything is inline? Contact your Wellesley adviser to discuss your options further.