End of year tax planning 2018/19
With the self-assessment tax return deadline behind us and the end of the tax year fast approaching, now is the perfect time to review your tax efficiency for the past year and plan for the year ahead.
The 2018 budget contained announcement on tax changes due at the beginning of April 2019. As a result, business owners and individuals may need to re-asses their plans to make the most of available reliefs and allowances.
Here we have outlined some general points to note, as well as changes to be aware of before we enter the new financial year.
Making Tax Digital (MTD)
Making Tax Digital for VAT comes into force on 1st April 2019 for VAT registered businesses with taxable turnover above the VAT threshold. They will have to keep digital records and use software which integrates with HMRC systems to prepare and submit their VAT returns. This will apply to the first VAT accounting period starting after the 1st April.
HMRC has a list of approved software providers. If your business is already using cloud-based accounting software, you should check it is compatible for MTD for VAT.
If you are not already using compatible software, get in touch with WMT’s Jane Spraggs to discuss your options for digital submissions before the 1 April 2019 deadline.
Dividends and renumeration
The tax-free threshold for dividends changed from £5,000 to £2,000 at the start of the 2018/19 tax year. This change means that dividends are no longer necessarily the most tax-efficient way for companies to extract income from their business. Although the reduced rate of corporation tax (19%) has gone some way to off-setting the reduced allowance, it will not make up for the tax now payable on dividend income that exceeds £2,000.
As profit extraction from dividends continues to be less favourable it is advisable to review your approach to make sure you are using the best available options.
To discuss options for extraction profit from your business in the most tax efficient way, contact your usual WMT tax advisor or Anne-Maree Dunn.
Capital gains tax and entrepreneur’s relief
The exemption rate for 2019/20 will rise from £11,700 to £12,000. The capital gains tax (CGT) annual exemption cannot be carried forward to the next tax year, so it is important to utilise the allowance to its full potential each year where possible.
Entrepreneur’s relief (ER) is available to shareholders disposing of business assets. The 2018 budget announced immediate changes to the qualifying conditions for ER that may impact shareholders’ entitlement to the relief if conditions are not met.
Two new tests will require ER claimants to have a 5% interest in both the distributable profits and the net assets of the company. The rules are now relatively complex, despite some recent relaxation over the detail of these tests. The conditions must be met in addition to the current rules throughout the specified qualifying period. Failure of any of the tests will mean that entitlement to ER is lost.
If you are disposing of assets where ER may apply, seek advice as soon as possible as some conditions need to be met 24 months before the disposal. For disposal of assets on or after 6 April 2019, the minimum period that qualifying assets must be held is extended from one year to two years.
Annual Investment Allowance
In the 2018 budget the chancellor announced an increase to the Annual Investment Allowance (AIA) from £200,000 to £1m for expenditure incurred from January 2019 – 31st December 2020. This means the first £1m of qualifying expenditure is available for 100% relief in the first year it is incurred.
There may however be complex calculations for accounting periods that fall either side of the two- year period. Advice should be sought if you are considering making investment during this time to make sure you make the most of the AIA.
New structures and buildings allowance
A new capital allowance regime, the ‘Structures and Buildings Allowance’, applying to non-residential structures and buildings, was also recently introduced. For business owners it will help to provide tax relief on buildings for business use.
If left unclaimed, the relief cannot be carried forward. If your business is incurring significant capital expenditure, ensure claims are carefully reviewed to make the most of the allowance at the correct time.
Making the most of the personal allowance
The personal allowance is currently £11,850 for the 2018/19 tax year, this will rise to £12,500 for 2019/20 tax year.
There is a reduction in in the personal allowance if your ‘adjusted net income’ is over £100,000. The reduction is £1 for ever £2 in income above the £100,000.
For 2018/19 there is no personal allowance once your income exceeds £123,700. For 2019/20 there will be no personal allowance available where income exceeds £125,000. This means that the effective rate of tax when your income is within this band is 60%. In order to maximise tax savings and personal allowance it can be beneficial to reduce your income to below £100,000 by making pension contributions or gift aid payments to reduce your income to below the limit.
To discuss how this can be achieved, contact your usual WMT advisor or Paula Jeffs.
The inheritance tax (IHT) nil rate band is currently frozen at £325,000 until 5th April 2021. In addition to this the residential nil rate band will increase by a further £25,000 after 5th April 2019, providing £150,000 of inheritance tax relief in appropriate circumstance.
This means a potential £475,000 for a sole estate or £950,000 for married couple and civil partners could be left to children free from inheritance tax.
However, rules surrounding these allowances are complicated you should seek advice to ensure your estate is being administered in the correct way to make the most of the available tax advantages. There are also other opportunities to reduce your IHT liabilities during your lifetime.
The end of the tax year marks a good opportunity to review your IHT plans. To review your existing plans or to start putting planning in place contact Paula Jeffs.
Supporting articles: Inheritance Tax – planning to protect your wealth
Tax rates and rules are ever-changing, so it is important to review your financial situation regularly. What could have been effective tax planning in 2018/19 may no longer be the best option for the new tax year. To ensure you are making the most of what is available for you or your business, it is important to seek professional advice.