Personal Tax Planning Guide
2022/23
Introduction
In this interactive guide we set out some tax tips and actions that all taxpayers should consider in advance of the tax year end.
i
Caveats
This is based on the law at the time of writing – there may be several changes between now and 5 April 2023. Do not delay action until March 2023 – planning takes time and implementing it even longer. Not all the points covered will be relevant to all taxpayers. Action should only be taken after receiving specific, bespoke advice. Nothing in this document constitutes investment advice. This note is written solely for the UK tax point of view.
The UK’s Tax Take
NICs
Income Tax
VAT
Corporate Tax
Council Tax
CGT
Excise duties
Business rates
Inheritance Tax
Other
*Two-thirds of government money raised of £916 billion in 2021/22 was raised by the taxes listed above. The 33% ‘Other’ is a mixture of other non-direct taxes and other forms of government income.
20%
15%
12%
5%
4%
3%
2%
1%
33%*
10 COMPLIANCE
09 INVESTMENTS GENERALLY
08 INHERITANCE TAX
07 CAPITAL GAINS TAX
06 PENSIONS
05 TAX EFFICIENT INVESTMENTS
04 BUSINESS TAX
03 NON-UK DOMICILES AND RESIDENTS
02 PROPERTY
01 INCOME TAX – PERSONAL INCOME
00 INTRODUCTION
11 CONTACT US
Reviewing your tax affairs to ensure that available reliefs and exemptions have been utilised, together with future planning, can help to reduce your tax bill. Personal circumstances differ and so if you have any questions, or if there is a particular area you are interested in, please do not hesitate to contact us.
The tax rates are changing
On 17 November 2022 Chancellor of the Exchequer Jeremy Hunt announced a number of changes, including lowering the threshold at which the 45% tax rate becomes payable, reducing the exempt dividends each taxpayer is allowed, and reducing the CGT annual exempt amount.
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Income Tax is the largest tax source for the Government raising around 20% of all taxes and about 10% of the UK’s GDP. It was introduced in 1798 to help pay for the Napoleonic Wars as a purely temporary measure.
Personal tax returns are due by 31 January if filed electronically. Disposals of UK residential property by an individual or trust, at a taxable gain, or by a non-resident individual or trust irrespective of whether tax is due, require a return to be submitted, and tax paid, within 60 days of completion. Tax needs to be paid promptly or interest will accrue on overdue amounts, and possibly penalties depending on the delay.
Comply with the law
Personal Allowance: £12,570 (Income Tax) Annual Exempt Amount: £12,300 (Capital Gains Tax) Savings: £1,000 (Savings i.e. interest) Dividends: £2,000 (UK and foreign dividends) Each individual has one personal allowance and it should not, if possible, be wasted. These are reduced and/or lost as income increases.
Use your allowances
The top Income Tax rate is for annual income over £150,000.
Consider gifting assets to your spouse
Individuals with incomes above or near these thresholds can reduce their tax liabilities by reducing their taxable income below £100,000. This can be achieved by:
Changing income into non-taxable forms
Using ISA allowances every year
Giving income yielding assets to a spouse with lower income
Investing in tax-efficient assets such as EIS, SEIS or VCT investments
Making pension contributions
Making gift aid contributions to charity.
The penalties for non-compliance are now so great that filing accurate tax returns on a timely basis is essential.
Personal income over £150,000 is taxed at 45%. This is the highest tax rate … or is it? National Insurance contributions (NICs) are now applied to all earnings so that the top combined tax and NIC rate becomes 48.25%. The personal allowance is reduced by £1 for every £2 of net income over £100,000, so income between £100,001 and £125,140 is effectively subject to a combined tax and NIC rate that can rise to 66.6% for employees and 62% for the self-employed, considerably more than 45%.
The child benefit claw back is one of the highest marginal tax rates of any taxpayer.
Child benefit is clawed back where annual taxable income (or the taxable income of a partner) exceeds £50,000. The claw-back is at 1% of the benefit for every £100 of income over £50,000, so that when income reaches £60,000 the financial benefit of the claim is entirely lost. If both partners can keep their annual taxable income below £50,000 child benefit will not be clawed back. If both parents earn less than £100,000 and the children are under 11 years of age, then HMRC will top up payments made for childcare by the parents by paying 25% up to a maximum of £2,000. This is one of the highest marginal tax rates of any UK taxpayer!
Child benefits and childcare
Employers can offer employees the opportunity to sacrifice a salary in exchange for shares and share options, benefits in kind or pension contributions. Employees who sacrifice income (for example, to take them below the £100,000 threshold) in return for a tax-free pension contribution made by their employer would save Income Tax and NIC as well as retaining their personal allowances. This should be discussed with your employer, if appropriate.
Take tax-free alternatives instead of a bonus or salary.
Exchange salary for benefits
If you have substantial investments, consider rearranging them so that they produce either a tax-free return or a capital gain taxed at only 20% rather than income taxable at a maximum of 45%, for example:
Go for gains
Use of ISA allowances – ISAs provide tax free income and capital gains
Use of tax efficient investments such as EIS, SEIS and VCT’s which produce tax free income and capital gains
Invest in Reporting Funds as opposed to Offshore Funds
Invest in quoted shares that do not pay a dividend
Borrow to invest in rented land, although for an individual interest relief is restricted to the basic rate of 20% if the property is residential.
Invest in tax free assets such as wasting assets.
Rent of up to £7,500 is tax-free by letting a room in your personal home.
Rent a room in your main residence tax free
Have you claimed £6 per week (£312 per year) on your tax return? If your job requires you to work from home during the tax year you should make sure this allowance is claimed. Unlike 2021/22 working rom home must be required by your employer, and you need to be able to demonstrate that you cannot work elsewhere. If it is a choice made by the employee it cannot be claimed.
Working from home
Payments to charities made through the Gift Aid system benefit the charity and the donor. A 45% taxpayer who pays £80 to a charity will receive £25 tax relief and the charity will be able to reclaim £20. Gift Aid donations made personally to charities in 2022/23 can be treated as made in 2021/22 to accelerate tax relief, at any time prior to the submission of the tax return.
Give to charity
A taxpayer should consider shifting income from future tax years into this year where advantageous, or vice versa. This can be done in a number of ways. For example closing a bank account before 5 April 2023 to crystallise interest in the current tax year while there is a larger tax-free allowance. Declaring a dividend before or after 5 April 2023 depending on personal circumstances. For unincorporated businesses making bad debt provisions general rather than specific, or disclaiming capital allowances can shift reliefs into the next tax year.
Property
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Historically the price of a fixed supply such as land has risen over time as demand has increased with an increasing population, and as its value has risen, governments have continually sought new ways to tax the profits of landowners.
A company will only pay 19% Corporation Tax, due to increase to up to 25% from April 2023, as opposed to up to 45% Income Tax by an individual. However, it must be a ‘business’ and not a mere ‘investment’, but a ‘business’ does not need to be as active as a ‘trade’. This distinction has been the subject of recent legal challenges by HMRC. Prior to considering the incorporation of a rental business, advice should be sought in relation to the Stamp Duty Land Tax (SDLT) implications of such a transfer.
Incorporate a rental business
It is possible to ‘roll over’ a rental business in exchange for shares by transferring a property business to a company in exchange for shares.
Interest is only deductible at the basic rate of Income Tax (20%) against rent received by an individual. Rent received by a company may attract a full interest deduction with tax relief at 19% (up to 25% from 2023).
Beware of the restriction of an interest deduction against rent from a let property
Do not own UK residential property that will be ‘owner occupied’ through a company otherwise the Annual Tax on Enveloped Dwellings (or ATED) will become due. This starts at £3,800 and rises to £244,750 per annum depending on the value of the property, if the property is available for personal use. Always consider owning a personal home in individual names or with advice use a suitable structure such as a trust. The use of a trust has its own tax advantages and disadvantages.
Avoid paying the annual tax on enveloped dwellings (ATED)
Non-residents now pay Capital Gains Tax (CGT) or Corporation Tax on disposals of UK residential real estate. Individuals must file a tax return and pay the tax within 60 days of completion. Companies retain their normal Corporation Tax payment dates. If the property was owned before 5 April 2015 by a non-resident individual for CGT purposes, it can be ‘rebased’ to its 5 April 2015 value at that date. Commercial real estate is similarly taxed but its rebasing is to its value on 5 April 2019.
Beware of non-residents' capital gains tax
To buy a UK-sited house, you usually have to pay SDLT. Rates vary from 0% for purchases below £250,000 and 15% for purchases over £1,500,000 if the purchaser owns another property.
Stamp Duties are a favoured method of raising taxes for many governments because they are efficient to collect. They are paid when something needs to be registered, such as a transfer of ownership of land. They are amongst our older taxes.
Stamp Duty Land Tax (SDLT) is now an important element of the cost of buying property
It is possible to claim a commercial rate of only 5% (the non-residential rate) when six or more properties are purchased in a single contract. Speak to your adviser if you think this may apply to your situation.
Don’t forget to check whether you are entitled to First Time Buyer’s Relief.
Total SDLT relief is possible for land in a Freeport.
Scotland has a separate tax – Land and Buildings Transaction Tax (LBTT) and Wales has a separate tax – Land Transaction Tax (LTT), each with their own rules.
Always seek SDLT advice as the rules are complex.
The advantages include Business Asset Disposal Relief (BADR) so only 10% CGT might be payable on the first £1m of gains, capital allowances on the purchase of some fixed assets can be deducted from rent and the profits count for earnings for pension purposes. In addition, Small Business Rates Relief may be available. Speak to your tax adviser if you think your property may qualify.
Furnished holiday lettings benefit from a number of tax breaks but there are tests to be met in order to qualify. For 2022/23, the property must be available for letting for 210 days in a tax year and actually let for 105 days.
Furnished holiday lets - Do you qualify?
This means that such companies now pay 19% Corporation Tax on profits, due to increase up to 25% after April 2023. Such companies should also consider whether the rules for annual tax on enveloped dwelling (ATED) apply – see above.
Non-resident companies now pay Corporation Tax on rent, not Income Tax.
Non-resident landlords beware
Non-domiciled and non-resident individuals
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The UK is not unique in offering tax advantages to new residents. In Europe alone countries offering advantages to new residents include Belgium, Cyprus, Greece, Ireland, Italy, Malta, Portugal, Spain and Switzerland.
Is your spouse or partner ‘non-domiciled’? Most UK residents pay UK tax on their worldwide income and gains. However, UK tax resident non-domiciled individuals (RNDs) only pay tax on what they earn in the UK and on non-UK income and gains that they remit (bring into) the UK. After 15 years for UK tax purposes an individual will become Deemed Domiciled and nearly all his or her tax advantages disappear. By settling a trust before the end of the 15th year Income Tax and Capital Gains Tax (CGT) can be deferred by a Protected Trust, and Inheritance Tax (IHT) can be totally avoided due to the special Excluded Property Trust status offered to such trusts. Advice should be sought as to whether this approach is appropriate. Advice should also be sought on the effect that claiming non-domicile status may have on non-tax matters such as the devolution of your assets and even family law matters such as the adaption of children.
Non-UK domiciled individuals
Are you ‘non-domiciled’? An example of a non-domiciled individual is someone born abroad of foreign parents who comes to the UK but does not intend to remain here forever. The concept is complex and the tax implications even more complex, so if you think that you or your spouse may be non-domiciled, detailed professional advice is essential. The rules of domicile are complex but most individuals take their domicile from their father at birth.
If 5 April 2023 is the end of their 15th year RNDs should consider establishing a trust which will qualify as a Protected Trust for Income Tax and CGT and an Excluded Property Trust for Inheritance Tax (IHT). The trust should avoid investing in Offshore Funds or Bonds with accrued interest because the profits from such investments are not protected due to a defect in the legislation. Generally the RND should consider crystallising non-UK income and gains, for example by asking for a trust distribution, selling an asset standing at a gain, deferring selling an asset standing at a loss, paying a dividend from a non-UK company and creating interest by closing a bank account to ensure that they have sufficient funding available to fund their lifestyle upon becoming deemed domiciled. Anyone becoming deemed domiciled should seek advice well in advance of this date in order to ensure that relevant actions are taken in relation to their overseas assets and ensure that going forward they are able to access taxed income and capital gains as far as possible in the UK.
Once a resident but non-domiciled individual (RND) has been resident here for 15 out of 20 tax years they become Deemed Domiciled and most of their tax advantages disappear.
Non-UK domiciled individuals in their 15th year of UK residence
The application of these rules may differ based on your circumstances. You may also need to remain non-UK resident for five full tax years in order to escape the UK’s Temporary Non-Residence (TNR) rules to avoid paying tax on income and gains arising during the first 5 years of tax non-residence as if realised in the year of return. You should also understand the local tax laws in your country of tax residence.
If you are not tax resident in the UK, you should not normally have to pay UK Income Tax on your income that arises outside the UK or CGT on assets sold. However, to establish yourself as a non-resident in the UK, you will need to meet the various requirements of the UK’s Statutory Residence Test (SRT).
Leave the UK
A system of designated foreign bank accounts needs to be established so that you can demonstrate that what you remit to the UK is not taxable. Individuals who remit otherwise taxable foreign funds to the UK to invest in qualifying trading or property companies are able to do so without incurring UK tax under a special relief called Business Investment Relief. Investments can either be by way of loans to, or acquisition of shares in, a company. Qualifying companies are unlisted, commercially trading and can also qualify for the Enterprise Investment Scheme (EIS) and attract further tax breaks, for example 100% Business Property Relief for IHT. Property companies can also qualify provided they are carrying on a ‘business’ and non-trading activity constitutes less than 20% of the trade. The funds must be invested in a qualifying company within 45 days of entering the UK. When the investments are sold the funds must be sent back abroad or reinvested in another qualifying company within 45 days.
If you are not domiciled in the UK, review your system of remitting funds to the UK for the 2022/23 tax year to ensure that the most tax efficient source of funds are remitted to the UK in priority.
Non-UK domiciled individuals – remittances to fund a UK business
HMRC counts the number of midnights that a visitor spends in the UK as days in the UK for these purposes. You can be a UK resident because you have visited the UK for as little as 16 days. The rules for those who have recently left the UK are different from than those for individuals who have arrived here for the first time. The rules take into account the number of days you spend in the UK and the number of ‘ties’ you have with the UK in a complex matrix to establish your residence status.
If you have been outside the UK for some time and established yourself as a non-resident in the UK, it is vital that you keep a careful watch on the number of days you have stayed here and your ties to the UK.
Stay non-UK resident
Business tax
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Individuals may carry on a business as a self-employment or partnership. As 5 April 2023 approaches they should carefully review their position in good time to commence any action that will require completion before that date. As can be seen from what follows such businesses are carried on in several different structures and subject to a wide variety of different taxes that need to be considered.
Succession – how long will 100% Business Property Relief be with us?
Owner-managed business
Dividends
Remuneration (including to family members)
Pension (including repaying a loan from your pension to the company)
Benefits
Key issues
Profits and cash in an owner managed and/or family-owned business can be paid out in a number of different forms, each of which has its tax advantages and disadvantages.
Extracting profits from an owner managed business or family-owned business
Company or partnership? How should I trade?
How to structure the shareholdings
Pensions
Renting a property to your company? Is it a good idea?
These include:
Rent on property
Purchase of own shares
Sell.
The best approach will depend on your personal circumstances.
View example
Consider a company earning £100,000 of profit.
Example
It will pay Corporation Tax of 19% leaving £81,000 to distribute as a dividend. Tax and NIC on that dividend will be a maximum of 39.35% assuming the shareholder has other income exceeding £150,000. That will leave £49,000 of the dividend in the hands of the shareholder after tax. An effective overall tax rate of 51%. If the rate of Corporation Tax increases to 25% the overall rate of tax increases to 55%. If instead the company distributes the £100,000 of profit as remuneration it will pay roughly £14,000 Employers’ NIC and pay £86,000 as remuneration. The company will then have no profit and pay no Corporation Tax. Assuming that the individual has other income in excess of £150,000 he or she will pay a combined 48.25% tax and NIC = £41,000 leaving £45,000 cash after tax and NIC in the hands of the individual, so again the overall effective rate of tax is 55%.
Claim for:
Maximise capital allowances
The Annual Investment Allowance, which the Government may keep at £1m going forward
Refund of tax for money spent on Research and Development - the Government has announced changes to the R&D rules which might lead companies to accelerate expenditure. Specialist advice is essential
A 130% Super Deduction for ‘plant & machinery’. Plant & Machinery can have a surprisingly wide meaning in this context
New commercial buildings, where appropriate.
Repaying the loan within the nine-month period is simplest, but if it is repaid later, the tax charge that the company will have to pay can be reclaimed. The repayment can be funded by way of a dividend, although this will of course be taxed in the hands of an individual shareholder. Any new loan made by the company to a borrower within 30 days is effectively treated as a continuation of the old loan.
If you have received funds by way of a loan from a ‘close’ company of which you are a shareholder, the company will face a 32.5% tax charge if the loan is not repaid within nine months of the end of the company’s accounting period.
Repay loans from a close company
The following are all tax-free benefits that can be provided to employees:
Pay employees tax-efficiently
A mobile phone
An interest-free loan of up to £10,000
Payments of up to £312 per year (£6 per week) are also tax free
Long service awards
Up to £150 per year for entertaining per employee
Free parking
Free electricity to charge an electric car or bike
Workplace nursery
Relocation costs of up to £8,000
Temporary Workplace Relief (TWR) can be a valuable relief.
There may be no National Insurance contributions (NIC), either for the apprentice or the employer.
Employ apprentices
If staff are required to work away from home for up to two years there are a number of important tax breaks, including travel costs from home to work and subsistence payments within limits.
Temporary workplace relief
The taxable benefit of a company car depends not only on the list price but also on the level of CO2 emissions.
Electric cars
A percentage is applied to the list price of the car and accessories – the older and higher the emissions the high the percentage. Electric cars will attract tax based on only 2% of their list price for 2022/23.
Have you claimed Coronavirus Job Retention Scheme payments (CJRS), Coronavirus Support Payments (CSP) or Self-Employed Income Support (SEIS)? Are you sure you are entitled to them and have reported them correctly to HMRC?
These are a potential minefield. Take professional advice and exercise care. Do not claim anything that you are not entitled to.
Coronovirus relief
The application of these rules can be complex, the penalties are harsh, so speak to your contact, if unsure.
A partnership that employs a service company, has partners with a fixed share or ‘salaried’ partners that are treated as self-employed or makes partnership profit allocations that HMRC may regard as uncommercial will cause these partners to have their taxable profit share recalculated and possibly be subject to PAYE.
Review partnership structures
Potential partnership tax problems
Mixed members – if a company partner is owned by an individual partner their profit share can be reallocated and taxed on that individual if HMRC deem the company’s profit share to be excessive
Disguised remuneration – if a partner is rewarded with an excessively fixed profit share they can be re-characterised as an employee and PAYE can be due, as well as NIC.
Some partnerships act as fund managers. There is much anti-avoidance around these rules, especially if these partnerships do not get rewarded by a fee but by a share of the profits of the fund. Two such issues are:
Potential partnership tax problems peculiar to funds
Carried interest is taxed at a special CGT rate of 28%
Disguised Investment Management Fees (DIMF): It mostly applies to fund manager partnerships remunerated on a basis other than a fee. It is taxed as income from a self-employment. This is a complex area and requires specialist advice.
If you think any of these scenarios may apply to you then you should seek advice immediately.
Mixed members
Disguised salary
Disguised Investment Management Fees (DIMF)
Carry.
VAT will be 50 years old in 2023, it was introduced on 1 April 1973. It is one of our biggest taxes raising around £150 billion and representing around 12% of our total tax take.
If you are carrying on a business as self-employment or in partnership, then give consideration to the following:
Sectors
The following sectors may all have unusual VAT treatment. If your business is operating in these sectors, it is likely that your VAT treatment will be non-standard:
Art
Builders
Charities
Education
Financial services
Food & catering
Hirers of goods
Insurance
Membership organisations
Online
Professional services
Sports
Tour operators
Any business involved in international goods or services
Groups of companies
Timing is a vital concept for VAT planning. It is essential to understand when exactly your business is making a ‘supply’ for VAT purposes. Areas that need to be carefully considered include:
The importance of correct compliance cannot be overstated. VAT is structured with heavy penalties for breaching a tight compliance code.
The type of entity which carries on the trade can be important for the VAT treatment
Timing of the issue of an invoice
Large one-off transactions, for example the sale of a property
Cash as opposed to Accruals accounting – avoids the bad debt trap
Avoid invoicing a ‘continuous service’ until payment is due
Get your deposits right – some are a VAT output and some are not
VAT refund claims – current, back-dated, overlooked
Partly exempt? – quarterly and annual calculations.
Get your compliance right
There is a risk of penalties that must be managed
Dealing with HMRC VAT inspections – routine or not, be alert for the traps!
Whether to form a partnership or incorporate?
Whether to trade in the UK as a subsidiary or a branch?
Import/export has special issues, which impact not only VAT but also Customs Duty
Customs Duty lays claim to be our oldest tax, dating back to the days of King Alfred
Import Duty – on import and export of goods post-Brexit
Trade with the EU is not necessarily ‘free trade’ any longer
Supply chains, where is Duty and VAT payable and by whom?
Classification
Valuation of cross-border goods
Purpose
Origin.
Get your documentation right
VAT is a tax where the correct documentation is essential generally And especially so with respect to the import and export of goods and services
Use corporate losses efficiently
The rate of Corporation Tax is due to increase
Incorporation - Non-domiciled owners specifically
Incorporation generally
Carry Back of Trading Losses
Basis Period Reform for partnerships
National Insurance Contributions are the second largest revenue raiser for the Government, comprising around 15% of all taxes raised. Planning to minimise NICs is surprisingly often overlooked.
NIC planning
International element
There is no Employer’s NIC for the self-employed which now saves over 15%. What benefits are being purchased? Should I pay voluntary contributions?
Employed vs self-employed
Who is the employer – home country or foreign country
Liability to social security contributions in the other country
Reciprocal social security agreements
Multi-lateral agreements with the EEA
Multiple employments.
If you have no other income in that year, the loss can be carried back to the previous tax year for set off. However, only losses of up to £50,000 (or 25% of your income if higher, capped at £2m) can be relieved in this way. The limit reduces to £25,000 if you do not work at least 520 hours per year in the business. Losses of the first four tax years of trading can be carried back for up to three tax years but are also subject to limits on loss set-off.
A trading loss arising from self-employment, or a partnership, can be set against your other income in a tax year to generate tax relief.
If not, seek advice. In the early and late years of the business lifecycle the method of taxing profits is not necessarily logical, some profits may be taxed twice and some not at all. Overlap relief for when profits are taxed twice can be complicated. Additionally, if there are losses, especially in the first four years of trading, there are varying abilities to utilise the losses to offset other profits of that or earlier years.
Does your self-employment or partnership business have an accounting year end of 31 March or 5 April?
The marginal rate of Income Tax is 45% for 2022/23, the Corporation Tax rate is 19%. If you are trading as self-employed or as a partner in a trading partnership, consider incorporating the business into a company.
If you are non-domiciled, consider rolling over the trade into shares in a non-UK incorporated company that is resident in the UK. That will give CGT and IHT advantages that can be preserved beyond 15 years by the use of a trust. This may be the subject of anti-avoidance legislation soon.
From 19% to 25% with effect from 1 April 2023. There are a number of steps that the directors of companies should consider:
Changing your accounting year end to crystallise a profit before next April
Selling an asset to crystallise a capital gain
Realising income before next April, for example by closing a bank account or selling a bond interest is paid.
There are new restrictions but, for losses of less than £5m, all losses can now be carried forward against all profits.
Read more
1 April 2023 update
Full expensing
R&D intensive companies
The 2023 Budget introduced ‘full expensing’ from 1 April 2023. Full expensing allows companies, for a period of three years, to ‘fully expense’ new (but not second-hand) plant and machinery expenditure which would otherwise qualify for 18% writing down capital allowances, or expense 50% of the cost if the expenditure would have qualified for the special rate of 6%. Numerically this is similar to the Super-Deduction as it also results in 25% relief in the year of expenditure. The Super-Deduction, which ends on 31 March 2023, gave 130% relief at the tax rate of 19%, equating to 25% relief. Full expensing will accelerate relief, but only for the 1% of companies in the UK that have capital expenditure on plant and machinery in excess of the annual investment allowance (AIA) of £1 million. Companies about to but plant and machinery may wish to defer or accelerate the expenditure after or before 1 April 2023 depending on their circumstances.
In the 2023 Budget there was a targeted increase in R&D relief for the 20,000 SMEs that are ‘R&D intensive’, broadly, companies whose R&D expenditure exceeds 40% of their total expenditure. The new R&D scheme will apply to accounting periods beginning on or after 1 April 2023 and will offer a 27% tax credit on qualifying R&D spend. Such companies may therefore wish to defer any imminent R&D expenditure until after 1 April. This is a complex area with a number of different schemes running simultaneously, some of which are in the process of being phased out. Detailed professional advice is essential before any irrevocable action is taken.
Tax efficient investments
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Tax avoidance is undefined and can be contrasted with tax mitigation which is taking advantage of tax breaks which the Government has legislated to encourage particular types of investment or activity, such as some of the investments discussed below.
It is possible to carry back Income Tax relief for up to 100% of your investments into qualifying EIS companies to a previous tax year, so a carry back claim made for 2022/23 investments would reduce tax liabilities for 2021/22, accelerating tax relief. There is also a Capital Gains Tax (CGT) exemption if the shares are held for three years and no Inheritance Tax (IHT) due to Business Property Relief (BPR). There is a Deferral Relief. For every £1 of EIS investment, you are able to defer £1 of other capital gains. The EIS shares must have been subscribed for one year before or three years after the disposal of the gain which is wished to be deferred. The claim for Deferral Relief must be made within five years of the EIS shares being acquired. The capital gains deferred will come back into charge (be ‘revived’) after the EIS investment is sold or if the investment fails.
Enterprise investment scheme
Investments in qualifying Enterprise Investment Scheme (EIS) companies attract Income Tax relief at 30% on a maximum annual investment of up to £1m for qualifying individuals. For Knowledge Intensive Companies the limit is £2m.
So, for every £1 of SEIS investment made, you can extinguish 50p of Income Tax. The same CGT advantages as for EIS are available. There is also CGT relief if the shares are held long enough, Deferral Relief and no IHT due to Business Property Relief (BPR).
Invest up to £100,000 in Seed Enterprise Investment Scheme (SEIS) companies and claim Income Tax relief at 50%. The capital gains of SEIS investments are exempt if held for at least three years.
Seed enterprise investment scheme
The loss can be carried back to the previous tax year for set off. However, only losses of up to £50,000 (or 25% of your income if higher) can be relieved in this way. Negligible value claims for assets that become worthless also can be made so as to crystallise a loss that can be set against other taxable income. The loss on such assets can also be set against taxable gains in the year if Income Tax relief is not required. Investors in EIS and SEIS shares that become worthless can also claim their loss against their income.
Losses on unquoted shares subscribed in qualifying trading companies relieve Income Tax, not just Capital Gains Tax.
Claim losses on unquoted shares
Venture capital trusts
Community investments
Social enterprise investments
Investment by crowdfunding a small business
Gambling and Spread Betting
Investments in Venture Capital Trusts (VCTs) can attract 30% Income Tax relief. Dividends from VCTs are also exempt. VCTs may not attract the same CGT and IHT reliefs as EIS and SEIS but are thought to spread the commercial risk.
Investments, by way of share purchase, in or loans to, an accredited Community Development Finance Institution (CDFI) can qualify for Community Investment Tax Relief (CITR).
Relief is given at 5% of the investment for the year of the investment and the following four years – 25% relief in total. There are a number of qualifying conditions but the most important is that the investment must be held for at least five years. CDFIs are set up to provide finance to enterprises (both profit-seeking and non-profit-seeking) within disadvantaged communities. If losses are made, they can be claimed against your other income in the year they are crystallised (and are not subject to the usual loss capping rules). Any income arising from the investment is taxable.
Social Investment Tax Relief (SITR) is available for investments into an accredited ‘social impact’ contractor or community benefit society. The relief is 30% of up to £1m against Income Tax. Additionally, CGT relief may be available, rather like EIS and SEIS.
Innovative Finance ISAs (IFISAs) allow investment, alongside many others, into a small business or businesses, tax-free up to the ISA limits of each individual crowd funder.
All gambling is tax-free unless you are a professional gambler and spread betting is a subset of gambling. There is of course no relief for losses.
Pensions allowances and limits
Consider maximising your personal contributions to personal pension plans and retirement.
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Pensions retain one great advantage - the ability to roll up income and gains tax-free. Many of the other tax advantages, especially in relation to contributions, have been scaled back over the last 15 years.
The annual contribution limit for an individual (the total of personal contributions and those made by an employer) is £40,000. Tax relief of up to 45% can be claimed. Unused allowances from previous years are available to carry forward into 2022/23. Contributions made by, or on behalf of, individuals that are in excess of £40,000 (plus any unused relief brought forward) trigger an Annual Allowance tax charge. Maximising contributions in 2022/23 may be advantageous – depending on your past contribution pattern, it is possible to contribute up to £160,000 before 6 April 2023 and obtain tax relief on the whole sum. For those on high income, the annual allowance might be tapered to as low as £4,000 (£10,000 for 2019/20), "high" being income of £200,000 (£110,000 in 2019/20).
The LTA is £1,073,100 for 2022/23 and at the time of writing is currently frozen until 2025/26. An individual may have elected ‘fixed protection’ before 6 April 2014 so that his or her LTA is £1.5 million or more. Fixed protection of £1.25m is still available for individuals who have not paid (or had an employer pay) contributions since 5 April 2016. Or, individuals with pension benefits totalling more than £1m as at 5 April 2016 may register that fund value as their own individual allowance, to a maximum of £1.25m, regardless of post April 2016 contributions.
Protect a large pension pot
Although funds invested within a pension can grow tax-free, there is a limit, known as the lifetime allowance (LTA). The LTA is the total amount you can hold in a pension pot: funds in excess of the limit will suffer penalty tax charges when you start to take pension benefits.
The earlier that these pension contributions are started, the more they benefit from compounded tax-free returns.
Stakeholder pensions allow contributions to be made by, or for, all UK residents, including children. So, consider making a net contribution of up to £2,880 (effectively £3,600 gross) each year for members of your family, even for those who do not have any earnings.
Stakeholder pensions
Take pension drawdown for over 55s
Make tax-free pension contributions
Leave your pension fund to your dependents
If you are aged 55 or over, you may be able to start drawing pension benefits now, even if you are still working. Individuals with a personal pension should be able to take this option but members of Defined Benefit Schemes are likely to face more restrictions and charges if a pension is taken early. Income drawn down in this way will be liable to tax at the individual’s marginal rate.
It may not even be necessary to start taking a full pension income immediately. For example, it may be possible to take 25% tax-free cash (TFC). Anyone who is entitled to flexible drawdown and who is considering becoming non-resident should seek expert advice on the potential tax savings of taking such actions while outside the UK tax net.
Employers can make pension contributions on behalf of their employees. This is tax-efficient as there is no tax to pay on this benefit and the employer can claim a Corporation Tax deduction. If you own the company, this can be a tax-efficient way to extract value from it.
It is often worth setting up arrangements where employees give up (sacrifice) some of their salary in return for a larger pension contribution made by the employer. This saves on National Insurance contributions (NICs) that would have been paid by both employer and employee and the savings can be passed on as higher pension contributions.
Ensure your pensions can be left to your descendants without Inheritance Tax (IHT) by writing a policy in trust.
If you die before aged 75, there is, generally, no Inheritance Tax (IHT) on a lump sum or income paid from your defined contribution pension fund to beneficiaries, assuming your pension arrangements were within your LTA. If you are aged over 75 when you die, payments made to your beneficiaries are taxed at the recipient’s marginal rate of Income Tax. So if the payments are made over a number of years it may be possible for the recipients to avoid paying higher rate tax. It is important to make sure that the pension provider is aware of your wishes (in writing) so that your potential beneficiaries have maximum flexibility. Make sure that certain older style pension plans – “buy-out” policies and pre 1988 personal retirement annuity policies – are written in trust or they may be liable to IHT.
5 April 2023 update
In the 2023 Budget Chancellor of the Exchequer Jeremy Hunt removed the Lifetime Allowance (LTA) charge from 5 April 2023, with its complete abolition from 6 April 2024. The Lifetime Allowance is the amount that you can build up in a pension and still receive tax benefits on. Amounts in excess of this attract punitive tax charges of 55%. The Lifetime Allowance is currently set at £1,073,100. It is possible to take 25% of your pension as Tax Free Cash (TFC). After 6 April 2023 the amount that you will be able to take tax-free will still usually be capped at 25% of the current LTA of £1,073,100 (£268,275). However, some taxpayers have previously elected to have a larger LTA of £1.25m, £1.5m or £1.8m, or their pension predates A-day (6 April 2006) and has no LTA at all. For those individuals with such protection in place on 15 March 2023, their TFC is and will remain a function of their “protected” amount. Those with protected pension pots should not rush to resuming paying pension contributions as this could curtail their 25% TFC.
This is a complex area and any action between now and 5 April 2023 should only be taken after seeking detailed professional advice.
In terms of contributing to a pension, the Annual Allowance (being the amount you can contribute to a pension and claim tax relief on) will be increased for contributions after 6 April 2023 from £40,000 to £60,000 with the fully tapered allowance being raised from £4,000 to £10,000 for those with “high” income.
Capital gains
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Capital Gains Tax was introduced in 1965. It was aimed at stamping out avoidance after some high-profile court cases. HMRC view it as a tax with a dual role of stopping avoidance alongside raising revenue.
Main residence reliefs
Capital Gains Tax If you have more than one house, you can elect which of them is to benefit from the exemption from Capital Gains Tax (CGT). However, there is a two-year window to make this election from the acquisition of the second property. In the absence of an election the question of which of two residences will be exempt from CGT as a main residence is decided as a question of fact.
Alternatively, if a qualifying investment in an asset used in a business was made in 2022/23, you can match this with a gain on disposal of another qualifying business asset within 12 months to roll over the gain that would otherwise be taxed in 2021/22. Speak to your tax advisor if you are unsure as to whether your fact pattern is applicable.
If you sold an asset during 2022/23 that had been used in your business and you realised a capital gain, the gain can be rolled over if you buy another qualifying business asset within three years.
Defer capital gains
If you sell UK residential property you must file a CGT return within 60 days, and any CGT should be paid then.
CGT filing & payment
If you have two homes, consider making a main residence election for your second home if it is standing at a larger gain or you are likely to sell it first.
Swap your elected main residence
Inheritance Tax There is a potential separate Nil Rate Band (NRB) for your house of £175,000. This tapers to nil as the value of your estate rises above £2m by £1 for every extra £2 value of your estate above £2m.
Recent cases have demonstrated that the owner must establish a period of residence. The quality, rather than quantity, of occupation of the relevant property is important.
Use past capital losses
Use annual exemptions
Crystalise CGT losses
Business Asset Disposal Relief - Pay only 10% CGT
Don't forget Investors' Relief
Gains or income
However
The sale of cryptocurrency at a gain will usually be subject to CGT as if a UK asset had been sold. Therefore, it will need to be treated as a UK disposal of an investment even for non-domiciled individuals.
Tax of crypto
This is based on HMRC’s view and practice, not the law
HMRC's view is that CGT applies in most situations
‘Stablecoins’ are sited for UK CGT purposes where the assets on which they are “linked” are located, so unlike other cryptocurrencies stablecoins may be non-UK sited. This is of special relevance to UK resident but non-domiciled individuals or trusts that own stablecoins directly.
Also, if your crypto position is liquidated you may not receive the capital loss treatment that you may be expecting
Is there UK tax reporting to enable your tax return to be completed efficiently?
Capital losses arising in the year are deducted from capital gains of that year or any future year, indefinitely. Gains are also reduced by the Annual Exempt Amount (AEA). Crystallising a loss that wastes the AEA should be avoided, and consideration can instead be given to deferring crystallising the loss to a tax year in which a bigger gain will arise.
The loss can be allocated against gains realised in the year that are subject to the highest rate of CGT. CGT can be 0%, 10%, 20% or 28%, depending on your other income and gains, and what has been sold. Once losses have been claimed on your tax return, any losses that are not set against gains in the same year can be carried forward indefinitely to be set against capital gains in future tax years. No relief will be given unless the loss is claimed on your tax return.
Everyone can realise capital gains up to £12,300 - the Annual Exempt Amount - which is the annual exemption for tax free gains in 2022/23. The exemption is available to each individual, including minor children but any exemption unused in a year cannot be carried forward.
Married couples and civil partners can transfer assets between them on a no gain, no loss basis and such transfers should be considered to ensure that each of their annual exemptions can be fully used. In addition, if one spouse or civil partner is a higher rate taxpayer but the other will not have used his or her basic rate band in full, similar transfers should be considered to ensure that at least some of any taxable gain is liable at 10% rather than 20% or even 28%. As always, it is important to ensure that any such transfer is outright and unconditional.
‘Bed and breakfasting’ of shares is the crystallisation of a gain or loss and then buying back the same number of these shares. In the past it was used to create capital losses. In general, it is no longer effective for tax purposes in its simplest form. However, where your rate of CGT is unlikely to vary in future years, it may still be possible to crystallise gains to mop up losses.
This could be achieved by a sale followed by a repurchase after 30 days by an individual’s spouse or civil partner, or within an ISA or trust. Alternatively, the balance of a portfolio of quoted shares can be maintained by selling shares in one company, crystallising either a gain or loss, and re-investing in another company in the same sector.
Business Asset Disposal Relief (BADR) may be available on the first £1m of an individual’s lifetime qualifying gains meaning that CGT is only 10%. Any excess gains are taxed at 20%.
There are a number of qualifying conditions to be met. The relief is given on the sale of shares in a qualifying business, typically a trading business, if over 5% of the shares are owned for at least 12 months. Shares acquired through an Enterprise Management Incentive (EMI) plan can also qualify, and in this case, there is no need to have a 5% holding. The period between grant and exercise must exceed two years, and this time limit should be borne in mind before EMI options are exercised and the resulting shares sold.
Business Asset Disposal Relief - pay only 10% CGT
This can also give a 10% tax rate on lifetime gains, this time of up to £10m. It is available to investors subscribing for ordinary shares in unquoted trading companies, which include trading companies quoted on AIM. There is no minimum holding requirements provided you subscribe for new shares.
Employees, directors or their families cannot usually benefit from this relief.
The main rate of CGT is 20% whereas income is taxed at rates up to a maximum of 45% or 48.25% if NIC is now taken into account.
So, you should consider investing to receive returns in the form of capital gains rather than income, for example by investing into UK Reporting Funds as opposed to Offshore Funds which will give rise to Offshore Income Gains (OIGs) subject to Income Tax if sold at a profit. UK Reporting Funds sold at a profit are only subject to CGT. Also consider investing into bonds. Bonds turn gains into income but with a 20 year+ deferral. Using a Discounted Cash Flow (DCF) approach 45% income tax paid in 20 years’ time is better than 20% CGT paid next 31 January.
To gain certainty of treatment your tax return should disclose the reasons that you have adapted the position taken, and this limits HMRC’s enquiry window to one year. Cryptocurrency and its related issues are complex. It is a fast-developing area and requires detailed advice before taking any irrevocable action.
Decentralized finance (DeFi) is an emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. The UK tax of “owners” of DeFi is complex .
Act now
The All Party Parliamentary Group (APPG) has recommended the abolition of Inheritance Tax (IHT) and its replacement by a tax of around 15% on nearly all transfers of wealth. So, give funds away now rather than later.
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Inheritance Tax is a relatively small revenue raiser for the Government, and one of the less popular taxes. It was introduced in 1984 to replace the even less popular Capital Transfer Tax (CTT), which was in turn introduced in 1974 to replace Estate Duty and was intended in the words of the then Chancellor, Dennis Healey, “to make the pips squeak”.
If such an election is made, the 100% exemption for transfers between spouses will apply to all transfers between them (during their lifetimes or on death). However, care must be taken with the election as it means that all assets owned outside the UK become liable to UK IHT and the election cannot be revoked while the individual is resident in the UK. If the individual subsequently leaves the UK, the election will automatically cease to have effect after five years of non-UK residence. If not already elected there is a time limit of two years after death.
Individuals who are non-domiciled and who have a UK domiciled spouse or civil partner can elect to be treated as domiciled in the UK for the purposes of IHT.
Spouses and civil partners domiciled outside the UK
Per person - £250 per year
Per year - £3,000 per year
Marriage - £5,000 per parent
Unlimited inter-spouse exemption so long as the spouse who receives the gifts is UK domiciled
Seven year rule for Potentially Exempt Transfers (PETs) - gifts made more than seven years before death are exempt from IHT
Business Property Relief (BPR) - 100% relief from IHT is available for pure trading companies or 'businesses'
Agricultural Property Relief (APR) - 100% relief from IHT is available for farmland, but there are conditions to be met if the land is only rented
Nil Rate Band (NRB) - general - £325,000
Residence Nil Rate Band (RNRB) - property - £175,000 but it tapers down as the estate rises above £2m
Gifts for education or maintenance
Normal expenditure out of income - this is a complex exemption where HMRC’s view may not accord with a strict reading of the law.
Use the Inheritance Tax (IHT) reliefs and allowance ... while they are around
Make a Will
Make sure your Executors know where it is
Curriculum mortis
Don’t leave a problem for your heirs
Make sure your Executors know what you own.
But beware...
The problems with digital assets! In order for your Executors to gain control over your digital assets they must know your passwords and codes.
Taking out Life Insurance written under trust to fund IHT can be more efficient than paying annual fees to maintain a complex structure, especially if IHT will only bite on the second death of spouses.
Financial advice should be sought.
Insure against IHT
Regularly reviewing and updating Wills as financial and family circumstances change and tax rules evolve is the best way for all individuals to manage their family’s IHT exposure. Make sure the Will can be found. You can register your Will at the National Will Registry.
Make a Will and update your Will
Make a Will! Dying intestate can cause terrible problems for your heirs.
Don't forget the residence nil rate band
Bare trusts
£175,000 but tapers as the estate increases above £2m
Only applies on transfers to ‘direct descendants’
Does not apply to other IHT ‘able transfers’ e.g. gifts within seven years of death or into trusts.
One alternative to a classic private trust is a bare trust, or nominee arrangement.
IHT on UK property owned by offshore entities
Invest in IHT-efficient assets
IHT relief on charitable gifts
This enables the seven-year PET ‘clock’ to start while the donors, for example parents, can continue to operate the assets practically so long as the donees, who are the owners agree.
Have trusts had their day?
UK residential property is now unavoidably subject to IHT, no matter how owned.
IHT is payable on the chargeable value of your estate above £325,000. However, several types of assets qualify for 100% relief from IHT. Consider realising your current assets and reinvesting in business and agricultural assets, shares in private trading companies and qualifying AIM listed shares.
Consider moving your assets to qualify for 100% relief
Consider a Discounted Gift Trust or a Gift & Loan Trust which allows the gifting of a lump sum into a trust whilst retaining a lifelong income
Transfer your shares from the full stock exchange to a qualifying AIM listed portfolio
Transfer your buy-to-let property to a qualifying business or agricultural asset
Invest in farmland, but in this case make sure that you meet the conditions to qualify for 100% APR.
If you already plan to make substantial gifts to charity in your Will, leaving at least 10% of your net estate (after all IHT exemptions, reliefs and the nil rate band) to charity could save your family IHT. A reduced rate of IHT of 36% (rather than 40%) applies where 10% or more of the net estate is left to charity.
This will reduce the cost of your gifts to other beneficiaries of your estate. The charitable gifts should be specified as a percentage of your estate, rather than a fixed sum or specific asset, to ensure that changes in asset values do not cause the eventual gift to fall below the 10% threshold.
A trust can be a tax efficient vehicle for UK individuals. However, over the years changes to the UK tax system mean that the tax advantages of trusts are now much less than a generation ago. Consider some of the alternatives to trusts:
Personal ownership
Bonds – UK and offshore
Open Ended Investment Companies (OEICs)
Private Unit Trusts (PUTs)
Family Investment Companies (FICS)
Tax privileged investments
UK Reporting Funds
Offshore Funds.
The timing of creating a trust can have significant tax implications and bring disclosure obligations. Trusts can still be tax-efficient in the right circumstances and for the right person. For example, the use of trusts in Wills carry Inheritance Tax advantages, and trusts settled by non-domiciled settlors carry not only Inheritance Tax advantages but also Income Tax and CGT benefits. Speak to your tax adviser as to whether settling a trust may be appropriate for your circumstances.
A FIC may be attractive in some circumstances if you are seeking to preserve and pass on family wealth, while at the same time creating tax efficiencies in relation to investments paying dividend income. FICs also offer the opportunity for deductions to be taken for qualifying expenditure such as investment management fees. Dividends paid out by the company would be taxed on recipients as normal so it may be more efficient to take loan repayments if the family wishes to extract funds. Differing shares classes can enable the gifting of shares to the next generation and can ensure that when a child needs income after age 18, for example to fund university education or a property purchase, this can be paid out in the form of a dividend. Where a parent sets up the structure, dividends paid to children before they reach age 18 are taxed on the parent under the settlement rules, so it may be more efficient for grandparents to set up such a company. If the children are shareholders, then this can be a useful estate planning tool. Speak to your tax advisor to see if this is suitable for you.
FICs enable parents to control the wealth they pass to their children, as well as having tax advantages.
Family investment company (FIC)
Investments generally
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As mentioned at the beginning of this guide, we cannot give investment advice. However, what we can say is that in considering what investments to make the old adage that “the tax tail should not wag the commercial dog” should be borne in mind.
Income and capital gains from ISAs are tax free and withdrawals from ISAs do not affect tax relief. Other ISAs include those designed to encourage the crowdfunding of small businesses, buying first homes and generally a lifetime ISA.
Pay the maximum into your ISAs
UK residents aged 18+ can invest up to £20,000 each and parents can fund a Junior ISA or Child Trust Fund with up to £9,000 per child - a total of £58,000 for a family of four.
Wine is usually regarded as a wasting asset that is tax-exempt, so again, can yield tax-free capital gains. However, HMRC have now indicated that wines capable of lasting more than 50 years will be subject to CGT. Investment in woodlands can also be tax efficient. There is no up-front Income Tax relief for the investment but if you have realised capital gains, these can be reinvested in woodlands and the gain rolled over until the land is sold. A gain on the land may qualify for only 10% CGT under the BADR. Income from timber sales is tax free, and the value of the investment can qualify for 100% relief from Inheritance Tax (IHT). If you sell the whole woodland, only the land element of any capital gain is taxable, not the increase in value of the timber. In all cases, be aware of trading. Trading profits are always liable to Income Tax.
There are a number of wider classes of investment assets that have specific tax advantages and should be considered if you already have a diversified investment portfolio. For example, motor vehicles are exempt from Capital Gains Tax (CGT) so investing in classic cars can yield tax free gains, so long as you are not trading.
Wasting assets are tax free
After such withdrawals reach 100% of the original capital (i.e. after 20 years) if the 5% is taken each year, Income Tax is payable on further withdrawals or on surrender of the policy. The 5% need not be taken in full each year, in which case it can carry forward to future years. Offshore bonds give rise to tax-free growth. They allow income and gains to accumulate tax-free until they are disposed of once the original capital investment has been repaid after 20 or more years. The excess is subject to income taxed at a maximum of 45% as has been previously described.
5% of capital invested can be withdrawn each year tax-free for up to 20 years.
Bonds
Compliance
The deadline for filing a paper return is 31 October and an electronic return is 31 January.
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The penalties for non-compliance have increased greatly in recent years. The timely submission of full and correct tax returns is now essential if interest and penalties are to be avoided and must now be every taxpayer’s priority.
Tax is due on the 31 January 2024 for income and gains arising in 2022/23 and reported on a 2023 tax return. However, tax may also have had to be paid on account on 31 January 2023 and 31 July 2023. If a position is taken on your tax return which is contrary to HMRC’s stated position it should be fully disclosed in a White Space Note to avoid extending HMRC’s enquiry window from one year from the date the return is submitted to 5, 12 or even 20 years.
Elections and claims must be entered on a timely basis by deadlines. The deadline may not run to 5 April 2023 but to some other date, for example 6 July in the case of making good a benefit-in-kind or 31 January 2024 for carrying back EIS or Gift Aid to 2022/23. Main residence CGT elections must be made within two years of acquiring the second property. VAT essentially chooses its own year-end, as do pensions for PIPs, and companies not only need to consider changes from 1 April 2023 (not 5 April) but also the end of their accounting period.
Copyright © Blick Rothenberg Limited 2022/2023, All rights reserved. While we have taken every care to ensure that the information in this publication is correct, it has been prepared for general information purposes only and is not intended to amount to advice on which you should rely. Blick Rothenberg Limited is a company registered in England and Wales under registration number 10238654. Blick Rothenberg Audit LLP is a limited liability partnership registered in England and Wales under registration number OC377158. A list of members (who we refer to as partners) is available for inspection at the registered office. Blick Rothenberg Audit LLP is authorised and regulated by the Financial Conduct Authority to carry on investment business. Blick Rothenberg Global Business Services Limited is a company registered in England and Wales under registration number 1808024. Each entity’s registered office is at 16 Great Queen Street, Covent Garden, London, WC2B 5AH.
