Tax Planning Opportunities – a potential silver lining in a COVID-19 dark cloud
Watching the value of investments fall is not an enjoyable experience for any investor however, despite the inevitable worry, tax planning opportunities are available.
Banking Losses. The “bed and breakfast” of shares previously allowed a taxpayer to crystallise a Capital Gains Tax (CGT) loss by selling shares and buying them back the following day. Rules now prevent this unless there is at least 30 days between sale and repurchase. An individual can however “bed and spouse” shares ie one spouse can sell the shares and the other spouse can buy them back. Both transactions must be done on the stock market, and the losses created can be used at a later date, provided they are claimed in your next tax return. This could be useful for shares which you do not plan to sell in the future but are planning to sell other assets at a gain in the future.
Minimising IHT/CGT on Gifts. The market crisis may assist a taxpayer to pass assets to the next generation. Giving away assets during lifetime can reduce an individual’s exposure to Inheritance Tax (IHT) on death. Lifetime gifts to individuals are Potentially Exempt Transfers and provided the donor survives for seven years after making the gift it will be free from IHT. If the donor dies within seven years of making the gift it is the value as at the date of gift that will be charged to IHT. This may be lower than the value at the date of death.
Lifetime gifting of assets such as shares is often unattractive as it is also a disposal for CGT purposes. Falling share prices may allow gifts to be made to family members with a lower liability to CGT and any gain in the value of the shares belonging to the recipient of the shares.
Use of Trusts. Rather than transfer assets directly to their children or grandchildren individuals may wish to transfer assets to a Trust. The gift may be made without triggering a liability to CGT as the liability can be transferred to the Trustees and deferred until the Trust dispose of the assets.
Gifts to Trusts are however chargeable to IHT and an individual is limited to gifting assets with a value no more that their available nil rate band (currently £325,000) to the trust every seven years. Lower share prices will allow proportionally more assets to be transferred into Trust and if share values recover the growth in value will be outside the individual’s estate. Under current rules where the value transferred into trust does not exceed the nil rate band the assets can, within 10 years, be appointed to the beneficiaries of the Trust without a liability to IHT. This is the case even if the value of the assets at that time exceeds the nil rate band. Any CGT liability can again be deferred until the beneficiaries dispose of the assets, provided the beneficiaries are resident in the UK.
IHT is charged on the value of the deceased’s assets as at the date of death. Where the Executors sell shares within a year of death for a lower price than the date of death value, the IHT can be recalculated using the lower sale price. There is also a similar relief where land is sold within four years of a death.
HMRC has advised that anyone who is due to make a self-assessment income tax payment by 31 July 2020 now has until 31 January 2021 to make the payment. No penalties or interest for late payment will be charged in the deferral period. HMRC guidance makes it clear that the deferment is optional and anyone who is still able to pay the tax due by the 31 July deadline should do so.
The current crisis may have little impact on a taxpayer’s liability to tax for 2019/20, however many self-employed taxpayers and landlords may find that their income for 2020/21 is considerably less than for 2019/20. As companies cut and cancel dividends shareholders may also face a drop in their investment income.
Taxpayers who pay tax under self-assessment will be required to make payments on account of their liability to tax for 2020/21 on 31 January 2021 and 31 July 2021. Each payment equates to 50% of the tax liability for 2019/20 and if the payments turn out to be excessive a tax repayment will be made once the return for 2020/21 is filed.
A claim can however be made to reduce the payments on accounts if the taxpayer believes that their liability for 2020/21 will be less than for the previous tax year. Taxpayers should, prior to 31 January 2021, make a reasonable estimate of their income for 2020/21 and if appropriate make a claim to reduce the payments on account.
The Chancellor has already hinted at tax rises in the future and we do not yet know what changes, if any, are going to be made to IHT. The use of Trusts, whilst attractive at the moment, may also change in the next budget, whenever that might be.
If you’re looking for advice on how you can take advantage of any of these opportunities, please get in touch.
If you would like further information, please get in touch.
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