The new tax year has started.
Many people think about tax years (if they think about them at all) only when they are about to end, with last-minute panics about making pension contributions, using up ISA allowances, crystallising CGT losses and the rest.
We’d like to suggest that a better approach may be to think about a tax strategy for the year at the beginning – starting with a tax spring-clean, if you will, together with a plan for the year.
Those of you who joined us for our year-end tax planning webinar in January, or perused our 21 tips for 2021/22 in March, will be aware of the variety of tax planning opportunities available for businesses and individuals alike. We also give some ideas below.
Business tax
If you’re in business, are you in the right business structure? There are pros and cons to operating via a company as compared to a sole trade, partnership or LLP.
Tax is only one of the factors to take into account; but in tax terms you can assume, very broadly, that if significant amounts of profits are going to be retained within the business, incorporation may be worth considering: if pretty much all the profit is withdrawn for personal consumption it probably isn’t. But looking farther ahead, remember that for many companies the rate of corporation tax increases significantly from April 2023.
Whether incorporated or not, consider the possible tax benefits of ‘income sharing’ with a spouse, civil partner or ‘significant other’ – either by transferring shares in your company or by introducing someone as partner in a partnership or member of an LLP. The same principle may be applied to income from investment assets, especially rental properties.
If you are running a car through your limited company, it is increasingly likely (unless it is a zero-emission electric vehicle) that the amount on which you pay tax as a ‘benefit in kind’ now exceeds the real value of the benefit. If so, the sooner the car is taken out of the company the sooner your savings start.
If you’re not a company (and not therefore entitled to the new Capital Allowances ‘super-deduction’) and are contemplating heavy capital expenditure with a big lead time, bear in mind that the 100% Annual Investment Allowance reverts from its current £1m to £200,000 from 1 January 2022.
Personal tax
On the personal tax side, as well as giving earlier-than-usual consideration to things like pension contributions and ISAs, consider IHT planning. The annual gifts exemption of £3,000 resets every year and although it can be carried forward one year, that’s it.
Gifts in excess of the annual exemption (and which do not benefit from the separate ‘small gifts’ exemption of £250 per gift, or other specific exemptions) will normally be ‘potentially exempt transfers’ if made to individuals and will fall out of your estate once seven years have passed. Again, the sooner the gift is made, the sooner that seven-year period starts (and – more to the point – the sooner it ends).
Further, although no specific measures have been announced, the mood music – whether emanating from the Office of Tax Simplification’s reports on CGT and IHT or the Wealth Tax Commission report – is that capital tax planning is not going to get any easier in the immediate future. Now may be a good time to take stock – and to do so without the normal pressures of the tax year-end.
For more on the scope for a New Year tax health-check, please get in touch with your usual BKL contact or reply to this email.