Yasir Abbas outlines possible tax planning opportunities to consider before the tax year end on 5 April 2024. With the self-assessment season over, March is the ideal time to take stock of your tax position and review what may be done to reduce tax burdens before the end of the tax year.

Individuals: Director dividends

If you are a Director and Shareholder and haven’t used your personal or dividend allowance so far in 2023/24, extracting profits before 5 April 2024 makes sense so that the allowances are not wasted. In a family company situation, the availability of family members’ allowances should also be reviewed to ascertain whether they can be utilised to extract profits before the year end.

Consideration should also be given to paying a dividend to use up any balance remaining of the 2023/24 basic rate band, if delaying the extraction of profits until 2024/25 will mean being taxed at a higher rate. Note that money withdrawn as interim dividends are treated as distributions when paid, and final dividends when declared (or the date on which they are due to be paid, if specified in the resolution declaring the dividend).

Individuals: Directors' loans

At the time of writing, bank interest rates for personal borrowing are at a fourteen-year high at approximately 6.7%. If your company has a healthy bank balance and you need cash, rather than go to a bank, you can borrow from your company and repay the loan at a later date you’re your salary or dividends are paid. Director loans are usually (but not necessarily) made on an interest-free basis.

The loan may result in a tax bill as it counts as a benefit-in-kind, but a tax advantage is that the tax charge will often be minimal. Tax is charged on an employer-arranged low-interest or no-interest loan on the difference between the interest paid (if any) and the HMRC beneficial rate – currently just 2.25% (e.g., an interest-free loan of £20,000 to a director for the whole of 2024/25 results in a benefit of £20,000 x 2.25% = £450. The employer is also liable to secondary National Insurance contributions (NICs)).

A point to watch out for is repayment of the loan by nine months and one day after the accounting year end. If the loan is not repaid and your interest in the company is more than 5% of the share capital and the loan exceeds £15,000, then the company has to pay a tax charge of 33.75%. for 2024/25. Whilst this is repayable when the loan is written off it is a cashflow point to be aware of.

The plan should generally be for you to withdraw the loan as early as possible in the company's accounting year (e.g., if the company's accounting year end is 31 March 2024, you should generally wait until 1 April and then withdraw the cash) to give the maximum length of time for the loan to be repaid.

Individuals: Pension planning

The pensions annual allowance 'cap' stands at £60,000, or 100% of earnings if lower (‘earnings’ being from salary, bonus, taxable benefits, or royalties). Unused annual allowances can be carried forward for a maximum of three tax years, such that 5 April 2024 is the last opportunity to use any unused allowance from 2020/21. This assumes you do not have a high income (above £200,000) or have flexibly accessed your pension pot in which case your annual allowance may be lower.

The change in tax band level from £150,000 for 2022/23 to £125,140 for 2023/24 means that some employees (not only directors) may find themselves slipping into the higher tax rate band. Paying extra into a pension scheme reduces the adjusted net income (as does making charitable contributions). Making extra pension contributions not only increases pension provision, but for those who may be subject to a reduced personal allowance (i.e., those earning above £100,000), a personal pension contribution could claw back some of this allowance, giving an effective tax saving of around 60%, or more with salary sacrifice.

Pension contributions can also help families retain their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000. Child benefit is completely lost when income reaches £60,000.

Companies whose employees pay into a scheme could consider paying extra before the end of the tax year.

It should be checked that the maximum salary necessary to ensure the year counts towards the state pension has been made. As directors have an annual earnings period for NICs purposes, the salary could be paid in the March payroll run.

Individuals: Capital gains tax

The annual exemption for capital gains tax (CGT) is reduced to £3,000 from 6 April 2024. Usually, financial advisors advise clients to sell assets before this date to take advantage of the higher CGT allowance; but a tax saving up to a maximum of £540 for a basic rate taxpayer and £840 for higher-rate taxpayers (depending upon the type of asset) may not be incentive enough to sell a few days before the tax year end.

However, transferring assets to a spouse or civil partner (if they have any unused annual exemption or capital losses) and selling before 5 April so taking advantage of two sets of annual allowance might prove attractive. Note that these transfers must be made outright with no preconditions, or they may be challenged.

Individuals: In-date claims

The end of a tax year means a year less in the time limit for making claims. Time limits for specific claims vary, although most must be claimed within four years after the end of the relevant tax year (e.g., CGT gift relief, overpayment relief, repayment claims, backdated marriage allowance transfer allowance claims); however, main residence elections are two years.

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On 22 November 2023, Jeremy Hunt delivered the ‘Autumn Statement for Growth’. Against an improving economic backdrop, the Chancellor is keen to stimulate economic growth and highlighted 110 measures for businesses. In addition, there were significant statements relating to National Insurance changes and also the reform of work-related state benefits.

Headlines:

• Class 2 National Insurance contributions (NICs) will be abolished and the main rate of Class 4 NICs will reduce from 9% to 8% from 6 April 2024.
• Full Expensing for companies will be made permanent.
• The R&D Expenditure Credit (RDEC) and SME schemes will be merged into a single scheme from 1 April 2024.
• The qualifying period for Investment Zone and Freeport benefits will be doubled from five to ten years.
• The main rate of Class 1 employee NICs will reduce from 12% to 10% from 6 January 2024.

Download our full overview of the Autumn Statement 2023 here

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This short blog post was triggered by a recent conversation I had with a client who hasn’t lived in the UK for decades and yet I had to warn him that there was a risk he was now domiciled in the UK. As people become more internationally mobile, having homes in several countries, there is a misconceived idea that their domicile of choice ‘can be any of them’, when in fact it may be none of them.

Domicile is different to residence for tax purposes as it has wider ramifications in general law and many legal cases over the years have established precedence over the steps required to acquire a domicile of choice. A number of these cases are not tax related but can be used by HMRC as evidence of the legal viewpoint in relation to domicile.

When initially permanently leaving the UK, professional advice is often sought in respect of losing a domicile of origin in the UK by obtaining a domicile of choice elsewhere. For those who retain a domicile in the UK, their worldwide estate is subject to UK Inheritance Tax (IHT). With UK IHT at a rate of 40% on death and without any equivalent tax in many other countries, it is understandable that those emigrating take steps to ensure they have acquired a domicile of choice elsewhere and therefore have lost their domicile of origin in the UK.

After following the initial advice, many breathe a sigh of relief when, having left the UK for many years and not being tax resident in the UK at all, believe they are safe from UK IHT. But losing your domicile of origin does not mean it disappears. This is where the Pheonix nature of your domicile of origin can unexpectedly regenerate leaving your loved ones (or yourself in the case of lifetime gifts) facing an unexpected UK IHT bill.

Given that domicile is a general law concept it is not possible to simply not have a domicile. Where a domicile of choice has not been maintained, your domicile of origin rises out of the ashes and with it reinstates your liability to UK IHT.

One of the key cases in this respect is BARLOW CLOWES INTERNATIONAL LTD & ORS V HENWOOD [2008] EWCA CIV 577. This is not a tax case, but domicile was important for the receivers of the company being able to petition Mr Henwood in England & Wales. Mr Henwood had lived outside the UK for several decades initially establishing a domicile of choice in the Isle of Man. Later he moved to Mauritius and had homes in France and Mauritius spending time equally in both countries. This meant he had abandoned his domicile of choice in the Isle of Man and the question was therefore - where was he now domiciled? Although he took steps to establish a domicile of choice in Mauritius, the court found these were without substance and their lives were such that it was not possible to determine by their actions whether they had chosen to permanently reside in France or Mauritius. It was therefore held that for the period in question, he did not have a domicile of choice in either France or Mauritius but instead his domicile of origin reactivated, and he was domiciled in the UK.

For anyone relying on their domicile remaining outside the UK, it is certainly worth having a domicile review regularly and definitely following any change in your homes or residence, even if you have not been tax resident in the UK for many years. I regularly discuss any new homes and moves with my clients to ensure that we have a record of intention and, importantly, the client is aware of what they need to do to demonstrate real commitment to those intentions.

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UK Inheritance Tax – embracing the long term approach for lasting wealth preservation

Inheritance tax (IHT) in the United Kingdom has long been a subject of both curiosity and concern for families passing down their wealth through generations. In 2023, the UK witnessed a significant milestone as the government reported a record-breaking £2 billion paid in IHT in the period April 2023 to June 2023, an 11% increase on the same period in 2022. This has led to a media storm around the tax with some claiming it is “immoral” and others suggesting that the rich have special tactics not to pay any IHT at all. This shows a wide misconception of the IHT rules and there are a number of misleading statements making headlines which only add to the confusion.

Understanding Inheritance Tax in the UK

Most people are aware that uk inheritance tax is a tax levied on the estate (the property, money, and possessions) of a deceased individual but there are a number of other instances when inheritance tax can be payable. For example, certain gifts during your life can give rise to the lifetime IHT charge and many Trusts pay IHT every ten years and on certain transfers out of the Trust.

Each individual has a threshold allowance against inheritance tax known as the “nil rate band” (NRB) which in 2023/24 is £325,000. Additionally, since April 6 2017, a "residence nil-rate band" (RNRB) has been introduced, allowing individuals to claim an additional tax-free amount for the value of their main residence when passed on to direct descendants, such as children or grandchildren. However, the RNRB is tapered away once your estate is over £2 million.

Once your nil rate band has been used the rate of IHT on death is 40%, the lifetime IHT charge is 20% and the Trust IHT rate every ten years is a maximum of 6%.

Why is IHT increasing if planning is as easy as the media claim?

There has been a significant impact on the number of people being pulled into the IHT net from rising property prices and inflation which is compounded by freezing of the uk inheritance tax nil rate bands and gift exemptions, some of which have not changed since 1981. This is known as fiscal drag created by a static rather than progressive tax rate system.

So as more people find themselves facing IHT bills, the hurdle then is effective IHT planning. The main basis behind IHT planning is that you need to have passed on your wealth and assets, potentially at least seven years before death without retaining free ongoing enjoyment of them for these to be outside of your estate on death. Whatever is claimed online, there is a tight net of legislation designed to foil planning which attempts to circumnavigate this. Added into this is also the fact that transfers which may reduce your estate for IHT purposes may equally give rise to immediate capital gains tax charges or lifetime IHT charges. So pay tax now in order to save IHT later.

Being able to give away assets without future access is a limiting factor for a number of people. With people living active lives much longer and with an eye on being able to afford future care if needed, there is an understandable hesitation to how much of their wealth people are happy to lose complete access to. There is also the concern around losing generational wealth through a child’s divorce where the assets have been passed down without limitation. So, all in all, not as easy as the media claims.

Is a Trust or Family Investment Company the solution?

Placing assets into a Trust can remove them from an individual's estate, potentially reducing the value of the estate subject to IHT upon death. Additionally, some Trusts offer flexibility and control over how assets are distributed, providing individuals with peace of mind that their wealth will be safeguarded and managed responsibly. However, changes to Trust tax rules in 2006 means that there are restrictions on the value or the type of assets that can be placed in them without attracting an immediate lifetime IHT charge at 20%. It is also essential to remember that there are various types of Trusts, each with its own implications and complexities. In order to be effective, generally you or your spouse cannot be a beneficiary of the Trust. So again, any hesitation around future access to the assets needs to be considered.

The 2006 Trust changes saw the rise in popularity of Family Investment Companies (FIC). FICs are private limited companies set up to hold and manage family wealth, making them an attractive alternative to traditional Trust structures. One of the key reasons for their widespread appeal is their flexibility, allowing families to maintain control over their assets while minimizing IHT liabilities. But this popularity means that HMRC is now looking closely at their set up and there are a number of traps for the unwary.

So while either of these structures can be an effective tool in IHT planning, they are by no means a one-size-fits-all solution. Setting them up requires careful consideration of one's financial situation, long-term objectives, and the potential impact on beneficiaries. Setting up and managing these structures can involve legal and administrative complexities, which may incur additional costs. It requires careful monitoring and adherence to legal obligations.

The Long-Term Perspective on IHT Planning

Whilst the above may seem quite negative, it doesn’t mean there is nothing you can do. Some aspects of IHT Planning are around ensuring you are qualifying for reliefs you may be entitled to and you are not falling into simple traps which increases the size of your estate.

Our advice is also that IHT planning should not be treated as a quick fix but rather as a gradual, long-term strategy. While it may be tempting to seek immediate solutions to reduce IHT liabilities, a rushed piece-meal approach may overlook crucial elements and lead to unintended consequences for both the individual and their beneficiaries.

Client example: A new client asked to discuss IHT and on an asset review we found she had set up a FIC years earlier which she believed to mean that the assets in the FIC were outside of her estate. However, the FIC had not been correctly implemented so there was no reduction in the estate at all. After further discussions, we were able to take further action to ensure the FIC worked as intended.

My strategy with clients is to maintain an ongoing conversation with a summary of current thoughts and asset analysis regularly reviewed. Working closely with financial advisors for support around future wealth requirements is also helpful as is working with solicitors who can correctly prepare any wills and legal documents.

Client example: we reviewed a client’s will which they had described as ‘mirror wills’ only to find they were not mirror wills at all. Whilst everything was left to the spouse in the first instance in both wills, there were big differences in what would happen in the event of a second death. This difference gave rise to some significant increases in the IHT liability on the second death if it were the husband that died first. We suggested some crucial amendments and supported the client’s discussions around a compromise to reduce the potential IHT leakage if they died in the ‘wrong’ order.

Sometimes small annual planning can cumulatively accrue larger tax benefits - for example making pension contributions for an adult child. When your children start their own families and have increased outgoings their pension contributions may fall by the wayside whereas you could consider stepping in to make their regular contributions. The amount you can pay annually and how it affects your IHT will depend on your circumstances.

This proactive approach to IHT planning allows for adequate time to implement measures, such as lifetime gifting and structuring assets efficiently, without rushing into decisions that may prove less beneficial in the long run. Embracing IHT planning as a sustained process empowers individuals to make informed decisions, protect their assets, and secure a lasting legacy for their loved ones.

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