As part of Talk Money Week, we run through five less well-known tax tricks that are underutilised.
This week marks "Talk Money Week", an initiative that aims to get more people talking about their finances as a way of improving money management skills in the UK.
As occurs in other campaigns such as Good Money Week, various surveys will be carried out by industry players, highlighting a knowledge gap when it comes to personal finances.
While these surveys serve a purpose, we were keen to adopt a more practical approach than simply reporting on the nation’s shortfall in financial understanding.
With this in mind, as part of a series of articles this week, we have highlighted five little-known tax-saving opportunities that are not as widely used as they should be.
This tax break lets you transfer up to £1,190 of your personal allowance to your partner if they earn more than you, and is worth up to £238 a year.
To qualify for the break, the lower earner must have an income of £11,850 or less and the higher earner must be a basic-rate taxpayer (earning between £11,851 and £46,350).
In addition, you can backdate your claim to include any tax year since April 2015 that you were eligible for Marriage Allowance.
Thinking as a couple rather than as two individuals will generally help you cut your tax bill. One way to trim your tax liability is to own assets such as a buy-to-let property jointly.
You can then use both spouses' capital gains tax (CGT) allowance of £11,700 each. Richard Morley, a tax partner at accountancy firm BDO, says: 'There's no point in one person paying tax on gains above their CGT allowance when the other is not using theirs.
'Joint ownership of assets can help to reduce CGT at the higher rate to the basic rate.'
Donations by individuals to charities or community amateur sports clubs are tax-free if they are made using gift aid. According to Karen Clark, a tax partner at RSM, in certain cases making such a donation can reduce your tax by more than your highest tax rate.
If you earn more than £100,000 a year, for example, your personal allowance starts to reduce by £1 for every additional £2 of income. For 40% taxpayers earning between £100,000 and £120,000, this amounts to an effective tax rate of 60%.
A gift-aided donation to charity reduces the amount of income on which the personal allowance reduction is calculated, so that the penalty for having income in excess of £100,000 can be reduced or removed.
The rate of tax relief for a gift can therefore be up to 60% as you regain your personal allowance.
CAPITAL TAX GAINS ALLOWANCE
One of the best ways to reduce CGT is to make use of the CGT allowance every year.
For some investors, it may even be worth 'crystallising losses' in shares or funds that have not yet recovered from a fall in value, because capital losses can be carried forward to set against future gains.
If you don't want to sell out of an investment, one sensible move, if you hold 'unwrapped' (taxable) investments and have spare Isa (or pension) allowance, is to move the investment into an Isa or Sipp tax shelter.
The process, known as 'bed and Isa' or 'bed and Sipp', involves selling enough of your investment to realise gains up to the value of the CGT exemption, and then buying them back within your Isa or Sipp, or that of your spouse.
However, you should be aware that this may involve transaction charges and a period of time when your money is out of the market.
INHERITANCE TAX PLANNING TIPS
Generally, anyone gifting money must survive for another seven years after making their gift for the sum to completely drop out of their estate. However, some gifts are immediately inheritance tax (IHT) exempt.
- Grandparents can give up to £2,500 to each grandchild who marries without the gift being counted as part of their estate. Parents can gift up to £5,000.
- There is also an 'annual exemption' that lets you gift up to £3,000 each tax year, and you can carry over unused allowance from the previous year, enabling you to gift up to £6,000.
- Regular gifts, for birthdays for example, are also permitted, as is any number of small gifts up to £250, provided you have not already given the recipients 'exempted' gifts in the same tax year.
- Gifts to registered charities and political parties are tax exempt.
- Another way to exempt a gift from IHT is to make the gift out of normal expenditure. Unlimited amounts of surplus income can be gifted during your lifetime, as long as this is not at the expense of your usual standard of living.
Keep a formal record of the IHT-exempt gifts you make, as HMRC may require proof of your intentions.
Tax planning is a complex area, particularly in the case of IHT planning, so it is worth seeking the advice of a reputable independent financial adviser or financial planner.
Bear in mind, though, that inheritance tax rules may soon change, as chancellor Phillip Hammond has asked the Office for Tax Simplification for recommendations to ‘simplify’ the system.
Some experts, including Sagar Morjaria, a wealth adviser at Canaccord Genuity Wealth Management, believe rules around gifting could be tweaked. “The rules around gifting are excessively complex, to such an extent that individuals do not take advantage of them and indeed are not aware of some of the exemptions that exist.”
- This article was first published in March 2017, but has been updated on 12 November 2018.