Last-minute tax planning for clients

How to help clients make the most of tax allowances and prepare for the new tax year

The April 5 tax year end deadline is looming and many clients will have heard those familiar words, "use it, or lose it" in relation to their tax allowance.

While many advisers will have been helping their clients invest and save tax-efficiently throughout the year, there will be many clients who have last-minute tax questions and needs.

There is still time to maximise clients' allowances, whether that is using their pension or Isas.

Louise Halliwell, senior savings manager at Yorkshire Building Society, notes: “The last day of the financial year marks a milestone date for savers to be aware of.

"Based on the number of savers who rushed to deposit money in their Isa in the final weeks of last year’s deadline, we anticipate there’ll be savers needing that extra reminder again this year."

Read on to find out more about how to help clients prepare for the end of the tax year by making the most of their allowances.

Isas and pensions are most used tax wrappers

Isas and pensions may be two very distinct tax-efficient wrappers, but they are both equally popular, according to the latest FTAdviser Talking Pointpoll.

The poll asked financial advisers which type of tax-efficient wrappers their clients used the most.

Both Isas and pensions are commonly used, as 48 per cent of advisers who voted said their clients used these two wrappers the most.

Only 4 per cent of advisers said their clients invested in venture capital trusts, while not a single adviser said their clients put cash into enterprise investment schemes.

Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, said: "The results don't surprise me at all. I'm actually quite pleased to see VCTs and the EIS quite low down."

This makes Isas ideal for many goals unrelated to retirement, such as paying-off a mortgage, saving for a child's education.
Jason Hollands, Tilney

Jason Hollands, managing director and spokesperson at Tilney, said: "While rule changes introduced in 2015 have transformed the options for how pension pots can be used, removing the requirement to buy an annuity altogether, the earliest date a pension can be accessed is still restricted to age 55."

Pension freedom reforms introduced in April 2015 changed how pension pots can be accessed.

Mr Hollands added: "Withdrawals from Isas, in contrast, whether taken as income or capital, are entirely free of tax at any point and do not need to be disclosed on a tax return.

"This makes Isas ideal for many goals unrelated to retirement, such as paying-off a mortgage, saving for a child's education, wedding costs, holidays or to provide a rainy day fund."

Lauren Radford, head of business management at MJ Hudson Allenbridge, said: "One of the under-acknowledged benefits of Isas being so flexible are that you can do your traditional cash and shares but, moreover, you can place into many VCT and Aim inheritance tax portfolios through an Isa as well, maximising your tax efficiency."

Jack Rose, head of tax-efficient products at LightTower Partners, pointed out that VCT and EIS investments were not going to be suitable for everyone, as they are higher risk investments.

"They are only likely to be considered once investors have used up pension and Isa allowances,” he suggested.

But he added: "However, given the changes in recent years to pensions, and restrictions now facing a growing proportion of high-net-worth investors with either the lifetime limit or the tapered annual allowance, VCTs and EIS are more likely to be part of people's considerations."

CPD: How to help clients with tax-efficient planning

Words: Saloni Sardana
Images: Fotoware

What clients need to know to make the most of their tax allowances

As the tax year end deadline looms, some clients may be wondering how they can maximise their tax allowances and what they can do to plan differently next time.

The tax year runs from April 6 to April 5, but too often, despite having a year to plan, many clients will fail to plan throughout the year.

While the lead-up to the April 5 deadline can be a useful time to make sure clients have made the most of their tax allowances, advisers also need to ensure their clients start planning early for the next tax year.

Gill Philpott, tax and trust specialist at Ascot Lloyd, says: “While taking last-minute opportunities to use tax allowances before the clock strikes midnight on April 5, it makes sense that consideration should turn to early and long-term planning in the new tax year.”

What clients need to know

Jason Hollands, managing director of business development and communications at Tilney, says: “This particular tax-year end is taking place against a backdrop of chaotic politics and heightened uncertainty about the future.

“So, a really important message for advisers to deliver is that these near-term worries should not deter clients from making the most of valuable long-term allowances.”

Quite often, people who are affected by the tapered annual allowance don’t really know what their income for the year will be until near the end of the tax year.
Jason Witcombe, Progeny Wealth

This point that first and foremost clients need to be aware of their allowances is voiced by several others.

Dermot Campbell, chief executive of Kuber Ventures, says there are three main things that clients need to know before the tax deadline.

These are:

  1. Tax liability - clients need to be aware of their tax liability, which is the amount of taxation that a business or an individual incurs based on current tax laws and this needs to be known before tax planning can truly begin.
  2. Different products available to individuals to make the most of their tax allowances include pension contributions and Isas. Clients should, in turn, make full use of pension and Isa tax incentives, then if appropriate they can turn to Venture Capital Trusts (VCT) and the Enterprise Investment Scheme (EIS).
  3. Unused allowances - taxpayers, both businesses and individuals, need to know that the most you can pay into your pension in each tax year is £40,000. Carry forward enables individuals to take advantage of any unused allowances from the previous three tax years up to £40,000 from each year.

Tapered annual allowance

This is a particularly important year for some clients when it comes to maximising pensions, according to Mr Hollands.

He adds: “For high earners with a total income in excess of £150,000, who are affected by the tapered annual pensions allowance, this tax-year end is their last chance to use carry forward provisions to mop up any un-utilised allowance from 2015 to 2016 – the last year when they could invest up to £40,000, a much higher amount than they are now able to.”

Introduced in April 2016, the tapered annual allowance applies tax relief limits on threshold income and adjusted income.

For every £2 of adjusted income over £150,000, an individual’s annual allowance is reduced by £1.

Jason Witcombe, a chartered financial planner at Progeny Wealth, observes: “Quite often, people who are affected by the tapered annual allowance don’t really know what their income for the year will be until near the end of the tax year, and so there can inevitably be a last-minute rush.”

One of the most overlooked allowances is the annual capital gains exemption.
Jason Hollands, Tilney

Ms Philpott points out: “2015 to 2016 is the last year that the pension annual allowance was not tapered for high earners, as from 2016 to 2017 onwards high earners may find the pension annual allowance restricted to £10,000.”

But Mr Hollands believes that people may be taking the current generous tax relief system for granted.

He says: “[Former chancellor] George Osborne (pictured) came close to scrapping higher rate tax relief, while [Chancellor] Philip Hammond (pictured) has described these tax reliefs as ‘eye-wateringly expensive’, and it is easy to see how the current Labour leadership would find these reliefs a soft target.”

He adds: “One of the most overlooked allowances is the annual capital gains exemption and many people might be even more disinclined to crystallise gains after a tough year for returns in 2018.”

Taking priority

A number of riskier tax-efficient vehicles exist for investors who can stomach greater losses in return for potential higher returns.

Dominique Butters, senior business development manager at Blackfinch Investments, says: “One of the main advantages of an EIS is that investments can be carried back to the previous tax year.”

She continues: “This means if those company directors had wanted to invest in an EIS to reclaim the 30 per cent income tax relief to help offset the tax on the dividend, but have left it too late in the tax year, it wouldn't matter if the EIS provider invests the money in the following 12 months.”

“You can use carry back in relation to a number of allowances available to taxpayers,” explains Mr Campbell.

“With EIS, for example, the general rule is that the relief is available for the tax year in which the shares are issued. But if you choose, you can treat some or all of the shares as issued in the previous year and claim relief in that previous year, subject to the maximum £1m relief limit for the year.”

But Mr Hollands reiterates that EIS and VCT products should only be considered by advisers’ clients after Isas and pensions.

Instead, Mr Hollands points out a number of other ways in which clients can reduce their tax liabilities.

This is an ideal time for advisers to re-visit advice previously given to clients, ensuring it remains relevant and up-to-date.
Jackie Hall, RSM UK

He suggests: “Lifetime gifts to reduce exposure to inheritance tax or optimising the use of personal savings, dividend and capital gains allowances by making inter-spousal transfers of cash and assets between married couples or civil partners [are all other options].”

Mr Campbell highlights that giving money away as a charitable donation can yield tax benefits that clients are not always aware of.

He notes: “If you’re an individual looking into tax relief options, you could consider giving your money away.

“In all honesty, there are a significant amount of tax benefits to charitable donations, which is something that many clients are unaware of.”

“The Gift Aid scheme, for example, means that if you’re a UK taxpayer and you give money to charity, the charity can claim back the tax you’ve paid on this money,” he adds.

Jackie Hall, partner at RSM UK, identifies six allowances that clients can maximise:

  • The personal allowance of £11,850.
  • Private company shareholders may be able to advance dividends to utilise the dividend allowance of £2,000 if no dividends have yet been received in the year.
  • Married couples, and those in civil partnerships, can consider transferring income-bearing assets between themselves to maximise the use of allowances without creating CGT or inheritance tax issues. Although this is unlikely to have much impact so close to the end of the tax year (except possibly in the case of private company shareholdings), it will potentially create more tax-efficient ownership for the coming year.
  • Married couples, and those in civil partnerships, where one party is a basic rate payer and the other is not using their full personal allowance, can take advantage of the opportunity to transfer £1,190 of the lower earner’s personal allowance to the other and potentially save up to £238 in the tax year.
  • For CGT purposes, each individual has an annual exempt amount (£11,700 for the current tax year). As married couples and those in civil partnerships can transfer assets between themselves with no CGT consequences, it might be possible to maximise allowances by transferring ownership of appropriate assets where a sale is anticipated.
  • Individuals should, where possible, make sure they utilise their 2018 to 2019 Isa allowance of £20,000 before April 5. Even where the full allowance cannot be utilised it is still worth considering an investment into an Isa.

Year round planning

There are a number of ways advisers can help clients plan, so that they are wealthier and better prepared for next year’s deadline.

Mr Witcombe acknowledges: “There will always be exceptions but I try to help clients make Isa subscriptions at the start of the tax year, or to fund them via monthly direct debit.

“That frees up time to leave other matters, such as pension contributions, until later in the tax year.”

Ms Hall believes February and March is a quieter and easier time for advisers to run self-assessment deadlines.

“This is an ideal time for advisers to re-visit advice previously given to clients, ensuring it remains relevant and up-to-date, and reminding clients of the actions they should consider in advance of the year end,” she suggests.

“This is just around being organised and communicating with clients.

“For example, making sure that a client who needs to make a last-minute Isa or pension contribution is not going to be on holiday in the run-up to April 5,” adds Mr Witcombe.

As Ms Hall confirms, planning throughout the year is essential to ensure the best tax position for the client.

She points out: “Ideally, reviewing a client’s affairs when completing their tax return, rather than waiting until shortly before the tax year end, will give the client more time to consider which investments and strategies are most appropriate for them and avoid the last-minute panic.”

House View: Seven surprising facts about tax revenues around the world

Taxes are always a hot topic for the individuals and companies who pay them.

It is, therefore, perhaps unsurprising that an attempt by the OECD, an organisation made up of mostly rich nations, to collate and compare taxation in 35 countries will attract some attention.

Here, we pull out some of the most telling facts.

1. Most economies are taxed more now relative to GDP than at any point since 1990

Around 80 per cent of the countries covered have experienced an increase in taxation between 1990 and 2016. Higher tax income across all major sectors, particularly VAT and corporation tax, has pushed the ratio of tax to GDP to a record high of 34 per cent.

The reasons for this are complex, particularly the sharp rise since the financial crisis of 2008. It is not necessarily a result of indebted governments increasing tax rates to raise more money, as we explain below.

Source: OECD Global Revenue Statistics Database, Schroders. OECD average is for 2015 data.

2. This overall rise in taxation has happened despite corporate tax rates falling by around half since the 1980s

One high-profile story has been the “rates war” on corporation tax.

Countries have battled to offer the lowest rates in an attempt to attract companies.

To help show that, we have pulled in a chart from a recent academic paper. It shows how the average corporate tax rate has experienced a savage decline over an extended period of time.

It is also worth noting that higher pre-tax profits have increased overall corporation tax revenues despite lower tax rates.

Source: The Missing Profits of Nations, 2018, Torslov, Wier, Zucman.

3. Corporation taxes are a fairly insignificant source of government revenues

Source: OECD Global Revenue Statistics Database, Schroders. OECD average is for 2015 data.

This is nothing new. Despite the decline in corporate tax rates, corporate taxes have not fallen at all relative to GDP since 1990.

Given its low contribution to overall revenues, cutting corporation tax is a far less directly costly move than cutting income tax, despite growing public opposition.

Governments also hope that cutting tax rates for companies encourages them to base or expand their presence in a country, employing people who pay income tax and who buy taxed goods and services.

4. Value-added tax (VAT) and other goods and services taxes (e.g. duties) contribute a far higher amount to the coffers

Source: OECD Global Revenue Statistics Database, Schroders. All data is to end 2016 other than Australia, Greece, Japan, Mexico and OECD average, which are 2015.

5. The income tax burden, relative to GDP, has not increased in most countries since 2000. Tax hikes have been slipped in by the back door

Less attention-grabbing areas such as VAT and social security contributions have been the major areas the burden has been felt.

Source: OECD Global Revenue Statistics Database, Schroders. All data is to end 2016 other than Australia, Greece, Japan, Mexico and OECD average, which are 2015.

6. The UK consumer’s obsession with house prices is matched by the government’s desire to extract revenues from the sector

Tax revenues derived from property are higher in the UK, as a percentage of GDP, than any other major economy, more than double the OECD average.

Source: OECD Global Revenue Statistics Database, Schroders. All data is to end 2016 other than Australia, Japan and OECD average, which are 2015.

7. Greece and Italy are much criticised but generate more in taxes, as a percentage of GDP, than most other major economies

Raising the tax burden much further is not a realistic option.

Fiscal health can only be improved by spending cuts (such as a reduction in their very generous benefits) and/or efforts to raise productivity, such as relaxation of employment law.

The Italian political climate in particular makes neither an easy option, at least in the near term.

Source: OECD Global Revenue Statistics Database, Schroders. All data is to end 2016 other than Australia, Japan and OECD average, which are 2015.

Duncan Lamont is head of research and analysis at Schroders