A to Z of Tax Planning

Basic Rate Income Tax

This is the rate of tax paid by most individuals, on income above the personal allowance up to the higher rate tax threshold. The same rate applies to both earned income and savings income. The rate is currently 20%. Dividend income, over and above the dividend allowance, is subject to a rate of 7.5%.

Capital Gains Tax (CGT)

This is the tax that is due on the profit enjoyed on disposal or transfer of an asset or investment. Gains in excess of the annual exemption, which is presently £11,700 (2018 / 2019), are added to income within that tax year. Any gains falling within the basic rate Income Tax band are subject to CGT at a rate of 10% and any excess falling above the higher rate Income Tax threshold is chargeable at 20%. Residential investment properties, often known as buy to lets, carry an 8% surcharge, taking the rates to 18% & 28% respectively.

A limited form of relief known as Entrepreneurs Relief is available for the disposal of certain business assets, up to the value of £10 million. Where this relief is available, the tax rate reduces to 10%.

Some assets such as a personally owned main residence and investments such as Individual Savings Accounts (ISAs) for example are exempt from CGT.

Chargeable Lifetime Transfer

A chargeable lifetime transfer is a transfer that is not a Potentially Exempt Transfer (PET) and is immediately subject to Inheritance Tax (IHT). Transfers into a Discretionary Trust and transfers to companies are two such examples.

Corporation Tax

This is the tax that is due on the profits of incorporated businesses, i.e. Limited Companies or Public Limited Companies (PLCs). Profits include trading profits and gains from the disposal of assets or investments.

Profits in the year to 31st March 2019 are taxable at a rate of 19%.

Dividend Allowance

In the 2018 / 2019 tax year the first £2,000 of dividend income is taxed at 0%. Further dividend income is taxed at 7.5% up to the basic rate Income Tax threshold and 32.5% thereafter.

The dividend allowance was previously £5,000.

Higher Rate Income Tax

For most individuals, higher rate Income Tax is chargeable at a rate of 40%. This is payable upon taxable income in excess of £46,350 in the tax year 2018 / 2019. However, those with an income in excess of £150,000 per annum can pay Income Tax at a rate of 45%. An effective rate of 60% applies to those earning above £100,000 as a result of the removal of the personal allowance at a rate of £1 for every £2 of additional income. For 2018 / 2019, the personal allowance is £11,850, so this effective rate will apply to income between £100,000 and £123,700. With regard to dividends, the higher rate of Income Tax is 32.5% and 38.1% where these fall into additional rate.

Income Tax

As the name suggests, Income Tax is a tax on income. Not all income is subject to tax and tax is only due upon ‘taxable income’ above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax liability.

Tax is due at different rates depending upon the type of income

Income tax is assessed in the following order: –
General income such earned income, profits and rent;
Savings income such interest on bank or building society deposits;
Dividend income from shares.

Inheritance Tax (IHT)

IHT is usually payable on the value of assets or ‘estate’ when an individual dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. Estates don’t have to pay IHT where they are valued at less than the Nil Rate Band. In 2018 / 2019 this is £325,000.

An additional residential nil-rate band was introduced in 2017 / 2018. This was initially £100,000, however, it has increased to £125,000 in 2018 / 2019 and is expected to increase further to £150,000 in 2019 / 2020 and finally £175,000 in 2020 / 2021. There is, however, a tapered withdrawal of this additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

Lower Earnings Limit (LEL)

Level of earnings above which no Class 1 employee National Insurance is payable but is credited by the Government in order for the individual to qualify for certain benefits.

Nil Rate Band

The Inheritance Tax threshold or Nil Rate Band is the amount up to which an estate will have no Inheritance Tax to pay. In 2018 / 2019 this is £325,000. In the event that this is not utilised upon death by someone who is married or in a civil partnership, the percentage unused may be transferred to the survivor to be used against the value of their estate upon their eventual death.

An additional residential nil-rate band was introduced in 2017 / 2018. This was initially £100,000, however, it has increased to £125,000 in 2018 / 2019 and is expected to increase further to £150,000 in 2019 / 2020 and finally £175,000 in 2020 / 2021. There is, however, a tapered withdrawal of this additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

Personal Allowance

The amount of income that can be received by an individual in any single tax year before a tax liability arises. In 2018 / 2019 this is £11,850.

Potentially Exempt Transfer (PET)

PETs that are not Chargeable Lifetime Transfers are gifts that will be exempt from Inheritance Tax (IHT) providing the donor survives 7 years from the date of the gift.

Primary Threshold

Level of earnings beyond which Class 1 employee National Insurance (NI) is payable. In 2018 / 2019 this is £8,424.

Qualifying Policy

This is a life assurance policy that complies with Her Majesty’s Revenue and Customs’ (HMRC) ‘Qualifying Policy Regulations’. Proceeds on maturity or death will not give rise to a personal tax charge.

Residential Nil Rate Band

The IHT Residence Nil Rate Band (RNRB) was introduced in April 2017. This is in addition to an individual’s own nil rate band of £325,000. It is being phased in over 4 years and the full £175,000 allowance is not available until April 2020. The RNRB was initially £100,000 increasing by £25,000 each tax year until 2020:-

Maximum residence nil rate band
2017 / 2018                £100,000
2018 / 2019                £125,000
2019 / 2020                £150,000
2020 / 2021                £175,000

The RNRB is only available where the main residence passes to children (including adopted, foster or step children) or linear descendants on death. The rules have been extended to accommodate situations where the family home passes into the joint names of the deceased’s child and their spouse.

Clients with large estates may not see any benefit from the extra nil rate band. The RNRB will be reduced by £1 for every £2 that the deceased’s net estate exceeds £2M. This will mean that on it’s introduction there will be no RNRB available if the deceased holds assets of more than £2.2m. This will rise to assets of £2.35m in 2020/2021 when the full £175K allowance kicks in.

Reliefs such as Business Property Relief and Agricultural Property Relief are ignored when calculating the value of the estate.

Secondary Threshold

The level of earnings above which Class 1 employer National Insurance (NI) is due. In 2018 / 2019 this is £8,424. Earnings above this figure are subject to employer NI at a rate of 13.8% with no upper ceiling.

Trust

The primary advantage of writing an insurance policy under trust is that in the event of death the plan proceeds are payable without the need to obtain probate. This is a legal administrative process, which can sometimes be a long drawn out affair and one that may otherwise delay the payment of the benefit. The proceeds will be payable to the nominated beneficiary or beneficiaries regardless of whether a will has been drawn up or not. Policy proceeds paid out under trust are also outside of an individual’s estate with regard to Inheritance Tax (IHT).

Trust Deed

This is a legal document that establishes and governs the operation of a Trust.

Trustee

An individual or corporation appointed to administer the terms of a Trust document.

Upper Earnings Limit (UEL)

The maximum earnings on which Class 1 National Insurance (NI) contributions are payable by employees at the full rate of 12%. In 2018 / 2019, this level is £46,350. Earnings beyond that are subject to NI at a reduced rate of 2%.