As we approach the end of another tax year it is time to look again at some of the valuable exemptions available to you.
Inheritance Tax
Inheritance tax is payable at 40% on the value of your estate on death over the threshold currently standing at £325,000. If you own your own home the Residence Nil Rate Band will become available after 5th April 2017. This is increasing, but will start on 6th April 2017 at £50,000.
If you give away assets then they will still form part of your estate unless you live for a further 7 years, although a tapering provision comes into effect after 3 years. Some gifts, however, can be ignored when calculating the value of an estate. These are:
- Any gift to a charity, museum, university or community amateur sports club
- Total gifts of assets or cash up to £3,000 in each tax year. This is the “gift allowance”. Any unused gift allowance from the immediately preceding year can also be used, but only after the current year’s allowance has been used. Any gift which takes the value of gifts in the tax year to above £3,000 are taxable, as are any subsequent gifts in that tax year.
- Wedding gifts to your own child of £5,000 or less, to a grandchild or great grandchild of £2,000 or less, or £1,000 or less to anyone else.
- Gifts totalling under £250 to any person unless use of another exemption has been made to that same person in that tax year. This exemption cannot be used to reduce the tax on a larger gift, so a gift of £251 is wholly taxable.
- Gifts to help with the living costs of an ex-spouse, an elderly relative or a child under 18 or in full time education
- Normal gifts from surplus income. Surplus income is income over and above that required to maintain your normal standard of living. Normal means gifts such as Christmas and Birthday presents, or a regular gift.
Any use of the last two exemptions would require careful record keeping to show that the gifts qualified.
Capital Gains Tax
The first £11,100 of net Capital Gain, after deducting losses, in any tax year is exempt.
If net Capital Gains exceeds £11,100 then the rate of tax on the surplus depends on the level of other income in the year. To the extent that the Capital Gains takes total income and gains up to £43,000 then the gain is taxed at 18%. Gains above that level are taxed at 28%.
Pensions
The annual amount that you can put into a pension fund is restricted to the lower of the amount you earn in the tax year and £40,000. Unused allowances in the past three years can be carried forward provided that you have been a member of a scheme in those years and the total paid does not exceed earnings in the year of contribution. There are a couple of occasions when a pension contribution can be particularly valuable:
- Child benefit is withdrawn for people earning over £50,000. Pension contributions reduce gross income and may therefore keep you below this cut-off point
- Similarly, the personal allowance is withdrawn if earnings exceed £100,000. Again, pension contributions are taken into account and can be used to reduce your income to below this amount.
Finally, everyone including children can pay £2,880 into a pension even if they are non-earners, and receive an additional £720 from the government, making a total investment of £3,600.
Personal Allowances
If you pay tax at 20% and your spouse or partner earns less than the personal allowance of £11,000 then they can transfer 10% of that allowance to you. To do so they must go online to the HMRC website and have both their own and you National Insurance number and be able to answer a number of security questions. In the current year, this is worth additional net income of £220.
For more information about our personal tax services.