With the end of the tax year just days away, if you haven't already made the most of your annual tax allowances, you might want to consider the following and potentially cut your tax bill.
Put CGT gains to bed
Investors keen to shelter capital gains from tax can do so by selling investments and reinvesting the gains in tax wrappers in advance of the tax year end.
The old so-called bed and breakfast loophole, whereby individuals could sell investments at the end of one tax year and immediately re-buy them at the start of the next in order to reduce capital gains tax (CGT) or avoid paying it altogether, was closed in 1998. Under this strategy, investors used to sell investments, making sure gains fell within their CGT allowance and re-bought those investments the following day at a new base cost, essentially resetting the clock for CGT purposes. But now you can no longer reduce CGT by selling and buying the same holding within 30 days.
However, 'Bed and Sipp' and 'Bed and Isa' strategies allow investors to sell investments and then immediately re-buy them within a tax-efficient wrapper such as an individual savings account (Isa) or self-invested personal pension (Sipp). Because the transaction is carried out within a tax wrapper, the bed and breakfast 30-day rule does not apply, and it also makes sense to hold investments within an Isa or Sipp where they can grow free of tax.
The transaction will count towards your Isa limit, so it is only possible if you have not already used up your 2016-17 tax year Isa allowance of £15,240. However, in the 2017-18 tax year the annual Isa allowance rises to £20,000.
The time it takes to process a deal means that the deadline for making use of these strategies is a lot earlier than 5 April 2017 for many brokers, so you should consider taking action immediately if you have investments you've made gains on and would like to keep hold of.
Bed and Sipp transactions work in the same way and are ideal for anyone who wants to add extra money to a pension, but doesn't have extra cash. Investors using this strategy also benefit from a hefty tax relief added to the contribution, but this may not be suitable if you are in danger of breaching the pensions lifetime allowance of £1m and/or annual allowance, which for most people is £40,000.
Danny Cox, chartered financial planner at Hargreaves Lansdown, says: "Bed and Sipp and Bed and Isa are simple and cheap ways to shelter existing investments from tax, and in the case of Bed and Sipp there is an immediate 20 per cent tax relief boost. Higher-rate taxpayers receive additional tax relief on Bed and Sipp as they do with normal pension contributions. With the right planning you can turn profits into tax-free gains."
For example, a higher-rate taxpayer with £8,000-worth of funds, £3,000 of which was profit, would normally be subject to income tax on dividends, capital gains tax on amounts over the £11,100 annual CGT allowance, or inheritance tax after death. But if that individual used Bed and Sipp to move the £8,000 of funds into a Sipp, the £3,000 would fall within the CGT allowance, basic-rate tax relief of £2,000 would be added to the Sipp and up to £2,000 of higher-rate tax relief could be reclaimed via self-assessment.
Bed and spouse
If you have already used your CGT allowance you could transfer investments to your spouse without an immediate tax charge - any gain or loss is also transferred to them. They then have the option of selling the investments and using their own CGT allowance of £11,100. After that they could also make use of Bed and Sipp and Bed and Isa to avoid future tax charges.
Using both your annual CGT allowances means a couple can realise gains of £22,200 per tax year without any tax charge.
Bed and spread
Instead of re-buying the same holding, you might want to buy a different holding with the proceeds of the one you sell to diversify your portfolio. "For example, if you don't want to manage individual shares yourself, instead of repurchasing the same holdings, take the opportunity to reinvest in a managed fund," explains Mr Cox. "This will provide greater diversification, simplify your investments and make them more tax efficient at the same time."
The drawbacks
But remember that these transactions are not free. You will pay dealing charges to buy investments, although some brokers won't charge you to sell the original ones. For example, Hargreaves Lansdown doesn't charge you to sell shares online, or for postal Bed and Isa and Bed and Sipp instructions, but it charges standard dealing fees and stamp duty on each repurchase - £11.95 per deal if you place fewer than 10 deals within a month.
You should also consider the length of time you will be out of the market when you sell investments. Even though you do not have to wait 30 days if you Bed and Isa or Bed and Sipp, markets could still move while the transaction is going through.
Also make sure you claim any losses you have made on your investments in time. If you don't claim the loss within four years you can't then claim it subsequently, meaning that this tax year is the last time you can claim capital losses for the 2012-13 tax year.
MAKE USE OF THESE ALLOWANCES BEFORE TIME RUNS OUT
Annual inheritance tax (IHT) exemption
You can give away £3,000 a year as an inheritance without incurring any tax charge, and any remaining allowance from the previous year can be carried over too. So if you've not yet made use of your full allowance and want to pass money to children or grandchildren without any potential inheritance tax (IHT) risk, do so now. Married couples and registered civil partners who have not made any gifts in the past two years could give away up to £12,000 completely free of IHT tax before the year runs out.
£12,336 Junior Isa contribution
The annual allowance for a junior Isa (Jisa) or child trust fund (CTF) in the 2016-17 tax year is £4,080. But parents considering transferring their children's CTFs into Jisas could benefit from a quirk in the rules which allow them to pay in three allowances over a short time period, maximising the amount they can shelter from tax.
Unlike Jisas, where the allowance period is aligned with the tax year, CTF annual allowances are aligned with the child's birthday. So depending on the date of your child's birthday you could potentially add a large sum to a CTF and then transfer it into a junior Isa.
An example of how this works is as follows:
 Jane's daughter Amelia was born on 1 May 2004 and has a CTF. Jane would like to transfer Amelia's CTF into a Jisa as she wants access to a wider range of investment options. So Jane could put £4,080 into Amelia's CTF before 5 April 2017, and a further £4,128 into Amelia's CTF on or after her birthday on 1 May 2017 when the annual allowance for this and the Jisa increases to that level. She could then transfer the CTF to a new Jisa account. When the transfer has been completed Jane could pay another £4,128 into the new Jisa in the 2017-18 tax year. Source: AJ Bell |
Apply for Individual Protection 2014
Anyone wanting to protect their pension lifetime allowance should be aware that after 5 April 2017 it will not be possible to apply for 'individual protection 2014'. In 2014 the lifetime allowance dropped from £1.5m to £1.25m and in 2016 it went down further to £1m. Individual protection 2014 protects your pension fund value as at 5 April 2014 up to a maximum £1.5m, as long as you had pension savings worth over £1.25m in 2014.
Even people who have built up pension benefits within the past three years can use individual protection 2014. You can still apply if you have enhanced protection, fixed protection 2014 or fixed protection 2016, but cannot apply if you have primary protection.
Sarah Lord, partner and director of wealth planning at Killik & Co, says: "Alternatively, if you didn't have at least £1.25m in April 2014 you may still be able to secure protection through fixed or individual protection 2016, which can secure a lifetime allowance of up to £1.25m."
Make the most of your pension allowance (while you still can)
The annual pension allowance is the maximum you or someone else, eg your employer, can contribute to all your pensions in one year, without incurring a tax charge. "In 2016-17 the annual allowance [for most investors] is £40,000," says Adrian Lowcock, investment director at Architas. "This includes benefits being built in a final-salary pension. Pension contributions attract income tax relief at your marginal rate of income tax."
Tax changes to watch out for from 6 April Corporate bond funds change to paying gross interest Since April 2016 interest from bank and savings accounts has been paid gross as part of the introduction of the personal savings allowance, which means basic-rate taxpayers can earn up to £1,000 of savings interest tax-free and higher-rate taxpayers up to £500. The change is being extended in April to include any interest payments received from corporate bond or gilt funds. It will happen automatically and investors should declare any income received over and above the personal savings allowance on their annual tax return, or shelter their bond fund holdings in an Isa or Sipp to avoid incurring income tax. The residential nil-rate bandThose thinking about leaving a home to descendants should take note of the new residential nil-rate band introduced in April 2017. From next month anyone leaving a family home to a direct descendant will have up to an additional £100,000 added to their nil-rate band. That doubles up for married couples and civil partners. The additional allowance will increase to £175,000 per person over the next four years and could result in an immediate tax saving of up to £80,000 without the need to consider any complex estate planning arrangements. There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2m, however, at a withdrawal rate of £1 for every £2 over this threshold. |
