When it comes to tax, it pays to be organised, and it is important to be aware of the transition from the 2019/20 tax year to 2020/21 on 5 April 2020. Here are some key tax planning opportunities to be aware of. Some of these opportunities will be lost if not used before the tax year end of 5 April.
Capital Gains tax changes
From 6 April 2020 new Capital Gains tax rules will take affect regarding the sale and possible gifts of residential properties. The persons most likely to be affected by the changes will be:
• Buy to let landlords
• Owners of a second home / holiday home
• Owners who have not always lived in the property
• Divorcing couples
Sale of property – If you are in the process of selling a house which you lived in at some stage and you are now renting out, take steps to ensure the sale is completed before 5 April 2020. Changes re lettings relief and PPR relief could mean your tax liability is much higher if the sale is completed after 5 April 2020.
CGT payment window – If your sale of residential rental property is completed before 5 April 2020, you don’t have to pay any CGT liability until 31 January 2021. However, if your sale completes after 5 April 2020, you will have to pay any CGT liability and file a return within 30 days of the completion date.
Annual exemption – The CGT annual exemption amount for 19/20 is £12,000. This means you can generate capital gains of up to £12,000 from investments tax free. This allowance is per individual and is on a use it or lose it basis.
Reduce your taxable income
High earners could reduce their taxable income by making pension contributions (up to £40,000 for everyone earning under £150,000) and charitable donations. This could help you:
• Regain your tax free personal allowance which starts to be withdrawn for incomes over £100,000.
• Avoid losing child benefit which is gradually removed if one parent earns more than £50,000.
You can give away up to £3,000 each tax year Inheritance Tax (IHT) free.
• You can also make use of any unused part of your gifting allowance from 2018/19 in the current year.
• Using this year and last year’s allowance, a couple could potentially remove £12,000 from their estate before 5 April 2020 without any IHT implications.
Annual Investment Allowance – For sole traders, partnerships and limited companies, the Annual Investment Allowance (AIA) of £1million is available as a potential 100% deduction against your taxable profits for 19/20. This relates to qualifying capital expenditure on long-term business assets (plant & machinery, fixtures and fittings, excluding motor cars.) You may wish to consider accelerating any planned capital investments before the end of the tax year to potentially reduce your taxable profits.
You may have been one of the more than 700,000 individuals who submitted their 2018/19 tax return on the recent deadline day of 31 January 2020. If you found the process of finalising your 2018/19 tax return stressful, this is a good time to get more organised before the end of the 2019/20 tax year. Implementing good record-keeping systems that are updated regularly has the potential to transform your business. This will allow both you and your accountant to reduce the last-minute stress of complying with tax deadlines, and instead concentrate on adding value to your business in the most tax-efficient ways.