23.1.2024 | Tax

Start the year right – with tax planning

Get your house in order by sorting out your tax affairs, especially before the tax year wraps up on April 5th. 

From inheritance tax planning to wills and pensions, here, the experts at Beatons give a rundown on ways to plan ahead.

ISA and pension savings

One of the first tax planning points would be to maximise your ISA allowances for the 2023/24 tax year (currently £20,000 each). Also, consider increasing your pension savings before 5 April 2024, as the unused annual pension allowance from 2020/21 lapses after three years.

Year-end inheritance tax planning

Many were expecting an announcement from the Chancellor in the Autumn Statement about cuts to, or the abolition of, inheritance tax (IHT).

He could be saving it for his Spring Budget, so while we wait to find out, consider utilising the £3,000 gifts annual exemption for 2023/24 and, if available, the unused amount from 2022/23.

It’s important to know that £3,000 is the overall exemption for the tax year, not the amount for each donee. More generous amounts can be given away by taking advantage of the exemption for regular gifts out of income (See below).

Regular gifts out of income

It had been thought that the chancellor might restrict the exemption from inheritance tax for regular gifts out of an individual’s surplus income, but not for now. Inheritance tax is designed to tax transfers of capital.

The donor must be able to demonstrate that the gifts were made from surplus income for the transfers not to be taken into consideration for IHT.

This rule applies where there is a regularity to the payments, such as a standing order to pay school fees or pension contributions on behalf of children or grandchildren.

HMRC does require proof that the payments are paid out of post-tax income and do not limit the donor’s normal lifestyle. Detailed records are required, and we can help you with a suitable spreadsheet.

Paying pension contributions for others

Payments into a pension scheme are usually limited to the relevant earnings of an individual in a given tax year. This restriction does not apply where the contributions are less than £3,600 gross, allowing parents and grandparents to make payments on behalf of children and grandchildren with limited income. Payments of £2,880 a year would attract a 25% uplift from the government which could grow to a substantial amount by the time the child reaches retirement age (currently age 55 but increasing to 57 in 2028). The parent or grandparent may be able to justify that the payments qualify for the regular gifts out of income exemption from inheritance tax mentioned above if a standing order was set up for no more than £240 a month.

When did you last review your will?

Having spent time with family over the festive period, it might have crossed your mind to review your will. This really isn’t something to leave until later in life. It’s an important piece of planning to have in place at any stage, especially when considering property or provision for children.

Without a will, statutory rules dictate how your assets are distributed on death and these may not be tax efficient. You may want to make specific provision for your unmarried partner or for the guardianship of your children.

Many people mistakenly think that if they die without making a Will, their spouse (or civil partner) will automatically inherit everything, but this is not necessarily the case. According to the laws of intestacy in England, for deaths occurring on or after 26 July 2023, the surviving spouse would inherit a statutory legacy of £322,000, all of the personal effects, and half of the remaining estate. The deceased’s surviving children (or their descendants) would split the remaining half of the estate equally. If those descendants are under the age of 18, their inheritance is kept back for them until they turn 18. Note that intestacy rules are different in Scotland, Wales and Northern Ireland.

Handing down a family home

The wording of your Will is important when noting that the inheritance tax (IHT) nil rate band continues to be frozen at £325,000, subject to any announcements in the Spring Budget.

There is currently an additional nil rate band of up to £175,000 for passing on the family home to direct descendants on death. We can work with your solicitor to make sure your Will is tax efficient.

Where some of the nil bands are unused on the death of the first spouse, the balance is available on the death of the surviving spouse, potentially allowing a married couple (or civil partners) to pass on assets of up to £1 million at today’s rates without paying IHT.

The residence nil band is even available when you downsize to a cheaper property. For example, if a married couple currently live in a large house worth £500,000 and downsize to a flat worth £300,000, they could give away some of the proceeds during their lifetime and yet still benefit from inheritance tax relief based on the higher valued property. They could even sell the house and move into a rental property or a care home and still benefit from this nil band.

Charity donations

Leaving 10% or more of your estate to charity means the rate of inheritance tax on the amount chargeable reduces from 40% over the nil rate bands to just 36%. Make careful considerations around this, as it would reduce the amount to be passed to other beneficiaries.

For help and advice on any of the areas in the above article, please contact Beatons at info@beatons.co.uk or call 01473659777.

Beatons Group is not authorised to provide Investment advice. Before proceeding we recommend that you take appropriate advice from a financial advisor.