“In the Spring Statement the Chancellor was clear with his intentions to balance the books to help pay for the pandemic response, so despite the reductions you could argue that these allowances and thresholds are not going to be as good for a long time to come. As such, it will be vital for individuals to utilise their tax allowances as much as they can this coming tax-year and take advantage of the situation today.
“It is also worth remembering that many of these allowances have failed to keep up with inflation, which has risen by 26%* over the decade and continues to rachet up each month, effectively decreasing the allowances in real terms over time. Putting cash to work in a pension could help to beat inflation through investment growth and tax relief, while gifting to a family member now could make a real difference to them against the backdrop of the cost-of-living crisis and may help to reduce your IHT liability.
“The new tax-year presents no better time to plan for efficient use of allowances for the tax-year ahead. If you are unsure about where to start, a financial adviser can help you identify how to make better use of the tax allowances available to you.”
*Bank of England inflation calculator, 2012-2021.
Shaun Moore offers the following tips to make better use of tax allowances:
Bed & ISA
“Doing a bed & ISA can be a great way to bring assets within the tax shelter an ISA can provide. It is effectively bringing cash often from the sale of existing investments from outside of an ISA and buying the same holdings within an ISA.”
CGT headaches
“The latest data shows that £30.1bn was paid in capital gains tax in the last three years and this figure is rising. CGT is meant to be a tax for the wealthy but more and more of the middle classes are getting caught by it. An investment account with just £61,500 that returns 20% will see returns equal to the CGT exemption of £12,300. An £82,000 portfolio with returns of 15% would result in the same situation. By realising gains and making use of your allowance you are not allowing the problem to be kicked down the road. Staying invested is vitally important over the long-term but speaking to a financial adviser can help you mitigate some of the issues that can arise from rising asset prices, especially as this is a complicated area.
Family planning
“ISAs provide a very generous £20,000 allowance. While many won’t get near this, there are some who will max out their ISA and have excess cash to use. Thanks to the £9,000 Junior ISA allowance, a couple with two kids effectively have a tax free savings allowance of £58,000. In a more extreme example, a couple with six grandchildren can shield £94,000 in ISAs each year. This can bring about significant investment returns for the next generations and given the money is locked up until they are 18, it also reduces the concerns that come with gifting money to children.”
Flexi-ISA
“Not all ISAs are flexi-ISAs so it is important to see if yours is. These ISAs effectively mean that you can withdraw money from your ISA and pay it back within the same tax year without affecting your annual ISA allowance. Therefore, if you know you need to make a withdrawal but want your allowance protected, you should be ensuring your ISA is a flexi-ISA.”
Spousal exemption
“This can be a really powerful tool to help share the tax burden amongst a couple. If you are expected to exceed the capital gains tax exemption, then you may wish to transfer the asset to a spouse so they can use their own exemption to realise the gain and prevent you from paying CGT unnecessarily. The other thing you can do is transfer the asset into joint ownership, effectively boosting your CGT exemption from £12,300 to £24,600. Clearly if you both have gains to realise then you will need to manage these appropriately but using spousal exemptions can help mitigate some of the issues selling an asset can incur.”
Invest early in the tax year
“Rather than leaving top-ups and contributions to the last minute, you will want to consider investing as early as possible in the tax year in order to maximise time in the market. 2021 was a good year for markets but many will have missed out on these returns as they instead waited until the end of the tax year to get their financial affairs in order. Going forward, don’t be late as it can have significant impacts.”
