dos and dont's you should consider before 5th april to save taxLIKELY TAX RISES ON THE WAY – WHAT YOU CAN DO TO AVOID A SURPRISE TAX BILL

Whilst the country has been coping with the Covid19 pandemic The Office for Tax Simplification (OTS) has been reviewing Capital Gains Tax AND Inheritance Tax !

In the resulting reports the OTS has made an array of recommendations which will not only simplify the tax system BUT also mean a LOT MORE tax is paid….and paid by a LOT more people. Ouch !

WhO IS MOST LIKELY TO BE AFFECTED BY POSSIBLE CHANGES?

The people who would most likely to be affected by these possible changes are those with:-

  • Share portfolios
  • Business owners considering selling part / all of their business
  • Rental properties
  • Assets which are worth considerably more than the original purchase price.

WHAT ARE THE RECOMMENDED CHANGES?

With the Government looking to collect as much tax as possible to pay off all the debt racked up during the pandemic I’d be amazed if many of the following key recommendations on Capital Gains Tax (CGT) and Inheritance Tax (IHT) are not implemented….

1. Annual CGT Allowance Cut

Reduced down to £2,000 from the current £12,300.

This would mean a lot more sales transactions will be subject to CGT.

2. CGT Rates Rise

The CGT rates would be the same as income tax rates (i.e. 20%, 40% or 45%).

This would be a big rise as the 4 main CGT rates range between 18% and 28%.

3. Entrepreneur’s Relief scrapped

A business owner who sells 5% or more of the shares in their company (& meets all the other qualifying criteria) pays just 10% CGT on the first £1m of gain.

This change is likely to affect anyone who is considering closing down their company. That’s because when this happens Entrepreneur’s Relief could also be claimed if the remaining profits is extracted via a capital distribution rather than dividend which means a lot less tax is paid.

4. Various Inheritance Tax changes

Annual gift exemptions (including personal allowance of £3,000 per year) –to be scrapped

Business property relief – to be scrapped

Annual Inheritance Allowance (up to £500,000 per person) – to be scrapped and replaced by an annual lifetime transfer of wealth amount

5. Removal of tax free uplift on death

This is probably the biggest of all the recommended changes.

The current rules mean that when someone dies all their assets are revalued to their market value before then being transferred to their beneficiaries.

For most people this revaluing of the assets is likely to mean that there is NO Capital Gains Tax AND NO Inheritance Tax being payable.

This change would stop that with possibly a lot of tax suddenly becoming payable on assets in someone’s estate which have risen a lot in value.

 

WHAT COULD YOU DO?

Remember these are only recommendations and we have yet to hear what the Government will do.

BUT I suspect in the Budget later this year we’ll hear what changes will be made to Capital Gains Tax and Inheritance Tax.

The good news is that anyone who might be affected by these changes does have some time to organise their affairs to minimise future capital gains tax and inheritance tax bills.

 

Some possible things to consider….

1. Sell assets that you’re considering selling sooner – this ‘uses’ up the Annual CGT Allowance and any CGT is paid at lower CGT rates

2. Gift and Loan Trusts set up – some of your assets are transferred into the Trust – you would have access to the assets if you needed the cash BUT any increase in the asset value sits outside of the estate and not taxed.

3. Discounted Gift Trusts set up – some of your assets are transferred into the Trust – whilst you receive an ongoing income from those assets you don’t have access to it and the amount of IHT payable is reduced.

4. Transfer all /part share in assets to your spouse – splitting the assets means that all tax free annual allowances are fully used.

SO WHAT NEXT…?

Capital Gains Tax and Inheritance Tax are taxes which can be largely avoided AS LONG AS  someone’s financial affairs are well organized.

I’m expecting many of the OTS recommendations to be implemented SO it’s important to review your assets (property, shares, pensions, etc) and make sure they are well structured.

I’d recommend that this is done in the next month or so that you have enough time to avoid future tax bills by making any changes BEFORE this year’s BUDGET.

If you think these changes might affect you and you’d like our opinion and help please get in touch straightaway….

 

It is important that you take professional advice before making any decisions based on the information that you learnt here. While every effort has been made to make sure it is accurate it cannot be precisely tailored to your personal circumstances. This article is for general information only and no action should be taken, or refrained from, as a result of this information.  Professional advice should be taken based on specific circumstances in each individual case.  Whilst we endeavour to ensure that the information contained in the article is correct, no liability  will be accepted by KMA Accountancy which is a trading name of Kim Marlor Associates Ltd or damages of any kind arising from the contents of this communication, or for any action, inaction  or decision taken as a result of using any such information.

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