We are now around 11 months into the 2023/24 tax year, which means it is time for individuals to think about how their assets and income are structured, thus ensuring that they are taking advantage of any allowances and exemptions available to them.

The elements covered in this article may not apply to everyone, but give some idea of the areas to consider. Of course, it is not necessary to wait until the end of the tax year to take advantage of some of these opportunities, however often the full picture of an individual’s tax affairs may not be known until towards the end of the year.

‍Key areas to consider

‍Income Tax

There are currently no proposed changes to the income tax personal allowance, which will remain at £12,570 for the 2024/25 tax year.

‍Structuring of income-producing assets

For individuals taxable at the higher or additional rate (40/45%), and whose spouse has remaining personal allowance or basic rate band, it may be efficient to transfer some or all of the assets producing the income to their spouse.

Pensions

Making contributions to a registered pension scheme has the effect of increasing an individual’s basic rate band, and therefore tax relief is given by way of increasing the individual’s income taxable at 20%, rather than at 40/45%.

It is possible to carry forward up to 3 years of unused pension annual allowance (up to £60,000 per year), allowing for a single larger contribution to be made in a year. Therefore for the current year, it is possible to carry forward unused contributions from the 2020/21 tax year onwards.

However, for example, if contributing £100,000 to their pension scheme, an individual must also have “pensionable income” (broadly earnings) of at least £100,000 in the year of the contribution.

Additionally, for those with higher income, their annual allowance may have been reduced (to a minimum of £10,000), and the calculation of any unused allowance is based on their income for the year in question.

Finally, to add some more complexity into pension savings, it is expected that the pension Lifetime Allowance (currently c£1.07m) is expected to be abolished from 6 April 2024. This is expected to be replaced by new allowances. We have not seen legislation yet for exactly what these allowances will look like, but it is expected to be included in the Finance Bill 2024.

‍Gift Aid

Making charitable donations and claiming Gift Aid has a similar effect to pension contributions, by way of increasing income taxable at the basic rate.

To qualify donations must be made to UK registered charities (or Community Amateur Sport Clubs), or to some EEA registered charities. Donations to US charities do not qualify for Gift Aid (however many US charities do have UK registered equivalents).

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Capital Gains Tax (CGT)

Most UK residents have an annual exemption of £6,000 in 2023/24. If unused, this cannot be carried forward.

If, at this point of the year, any annual exemption remains unused, individuals may consider selling some assets/investments to crystallise gains and use their annual exemption. Additionally, where investments are currently standing at a loss, crystallising losses to offset any significant gains can also mitigate any CGT liability. Unlike the annual exemption, any unused capital losses can be carried forward to offset against any future capital gains.

The annual exemption is due to be halved to £3,000 from 6 April 2024, therefore taking advantage of the higher exemption this year (rather than after 6 April) can save up to an additional £840 of CGT.

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Other considerations

Inheritance Tax (IHT)

Generally, we would recommend that an individual reviews their lifetime planning regularly to ensure that their objectives are being met. A regular review of wills (especially where personal or work circumstances change) is also likely to be beneficial, especially where legislation may have recently changed. An individual currently has a nil-rate band of £325,000. Assets in an individual’s estate in excess of this may be chargeable to IHT at up to 40%.

Individuals have an IHT annual allowances of £3,000 per year, allowing for gifts to be immediately out of the scope of IHT. The annual allowance may be carried forward for one year, allowing for a gift of £6,000 to be made in a single year free of IHT.

Other allowances, such as the making of regular gifts out of income, and wedding gifts to certain people can also be made free of IHT. Advice should be sought, especially in respect of gifts out of income, as record keeping is key.

Individual Savings Accounts (ISAs)

UK resident individuals have an overall ISA allowance of £20,000 per year. Income and gains arising in an ISA are paid free of tax. Therefore, when combined with the transfer of income-producing assets between spouses, ISAs are an effective shelter from UK tax.

Note that many other jurisdictions do not recognise the tax-free nature of ISAs (e.g., the USA), so further advice should be sought if an individual holds an ISA when also a taxpayer in another jurisdiction.

‍Tax Efficient Investments

Investments such as the Enterprise Investment Scheme (EIS), Seed Enterprise investment Scheme (SEIS), and Venture Capital Trusts (VCTs) are common tax efficient investments which provide immediate income tax relief (at up to 50% of the investment), and which also may be exempt from CGT on disposal.

Relief can be claimed in the year of investment or, subject to the relevant provisions being met, be deemed to have been made in the previous year.

This post reflects the laws in force as of 22 February 2024. As ever, to discuss any of the above further, please get in touch with your usual Sanctoras contact.