30th March 2015
Too many people ignore the benefits of sensible financial planning at the start of each tax year writes Chase de Vere certified financial planner Patrick Connolly. Below he explains how to get a head-start…
The end of the tax year culminates in a splurge of financial planning activity as many investors aim to utilise their ISA or pension annual allowances or make sure that their tax affairs are in order. However, too many people then sit back and ignore the benefits of sensible financial planning at the beginning of each tax year.
This is a time when you’re entitled to a host of new allowances such as a personal income tax allowance, capital gains tax annual allowance and of course new annual ISA and pension allowances. By using your ISA and pension allowances at the beginning of each tax year, rather than the end, you could effectively benefit from an extra year of tax efficient growth or income.
The start of this coming tax year is significant as it marks the implementation of major changes to pension rules and regulations. These will radically alter the attractiveness of pensions, the taxation of schemes and how people can take benefits. For those aged 55 or older, or where earlier access isn’t required, pensions have never been better and the rule changes create fabulous financial planning opportunities. The previous restrictions will soon be gone and going forwards, with initial income tax relief, tax efficient growth, tax favoured death benefits pre- and post- retirement, inheritance tax advantages and far greater flexibility, pensions have never been so attractive. These changes mean that more people, particularly higher rate tax payers, should give serious thought to using their annual pension allowance over the course of the tax year, in the same way that they habitually consider their ISA allowance.
There were positive changes to ISA rules last year, including a significant increase in the annual allowance, adding the flexibility to move freely between stocks and shares and cash ISAs and the ability to inherit an extra allowance equivalent to a deceased spouse’s ISA holdings. The introduction of the new Help to Buy ISA might well be of interest to those trying to get on the housing ladder, and to their parents and grandparents
Savings for children
For those saving for children, from 6 April, Child Trust Funds (CTFs) can be transferred into Junior ISAs. This will provide a good opportunity for many people to review the savings they’re making for their children. CTFs have been the poor relation to Junior ISAs, with fewer investment options, higher charges and lower returns on cash accounts. With the ability to transfer, many parents will be able to move children’s accounts to those paying better rates of interest or with better growth prospects and lower charges.
People should review your income tax position, especially in light to changes to the increases in the personal allowance. Perhaps they have a lower earning spouse or partner and so it could make sense to hold savings or investments subject to tax in their name. Or if their income is likely to be just above a particular threshold, such as the £50,000 threshold for receiving the full child benefit or the £100,000 threshold where they start to lose their personal income tax allowance. If that’s the case they can think about options to address this, such as making extra pension contributions to reduce their relevant income.
Capital gains tax
The capital gains tax allowance for 2015/16 is £11,100. If this allowance isn’t used it is lost, although capital losses made can be carried forward to set against future gains. Many investments can be transferred between spouses or civil partners with no tax charge, this means a couple can make gains of up to £22,200 in the new tax year before they become liable to capital gains tax. Alternatively assets with gains could be transferred to a spouse who would pay a lower rate of capital gains tax
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
For those with larger portfolios, willing to take more risk and looking to generate income in retirement, Venture Capital Trusts (VCTs) can also be considered. These give 30% initial income tax relief and pay tax free dividends, which can be useful for those trying to supplement pension or investment income. Annual allowances for VCTs (£200,000) and Enterprise Investment Schemes (£1 million) also re-start from 6 April. However, while the tax attractions are undeniable, these vehicles typically invest in small, unquoted companies. They should only be used by those who have a broad investment portfolio already in place and who understand and accept the increased risks
Another allowance that re-starts at the beginning of the tax year is the £3,000 tax-free limit on gifts for inheritance tax purposes. It is also possible to use any left over allowance from the previous year. These gifts aren’t counted against the £325,000 nil rate band allowance.