When it comes to personal tax, a broad range of reliefs and allowances can be applied to the likes of Capital Gains Tax (CGT) and Inheritance Tax (IHT), and these should be carefully considered.
CGT, for example, has a reputation for leaving people with a potentially hefty tax bill on disposal of valuable assets.
However, careful planning about how and when an asset is disposed of can have a major impact on the size of the bill. Likewise, making careful use of other allowances can see your tax bills shrink considerably.
The capital gains tax allowance in 2019-20 is £12,000 and is likely to rise again in the new tax year. However, of particular importance for capital gains tax in the new year is changes to how property assets are treated.
In most cases, if a property has been your main residence, you will qualify for private residence relief during the last 18 months of ownership and the sale will be exempt from CGT – even if you live somewhere else during this period.
However, from 6 April 2020, HM Revenue & Customs proposes to reduce this final period of exemption to nine months.
There will also be changes to when CGT is payable on the sale of a home. Capital gains tax is currently paid when you file your tax return through self-assessment, which could be up to 10 to 22 months after a sale has taken place.
From April 2020, CGT will be payable within 30 days of the completion of a sale and sellers will have to complete an online return when they have made a gain.
The tax-free IHT allowance is £325,000 in the 2020-21 tax year, this allowance has remained the same since 2010-11. The standard inheritance tax rate is 40 per cent over the £325,000 threshold.
For example, if you leave behind an estate worth £500,000, the tax bill will be £70,000 (40 per cent on £175,000 – the difference between £500,000 and £325,000).
However, families can also now rely on the residence nil-rate band, which from April will allow families to pass on up to £1 million tax-free as long as a persons eligible property is passed on to a direct descendant.
From 6 April 2020, the Personal Allowance will continue to be set at £12,500 and then be indexed against the Consumer Price Index (CPI) in future years. The higher rate tax threshold, which requires people to pay 40% tax on their income, will remain at £50,000 in the next tax year.
National Insurance contribution (NIC) limits have also moved in line with the change in the income tax threshold. Those earning £8,632-£50,000 typically pay the full 12 per cent of NICs on earnings up to that level but only two per cent on income above this.
In terms of dividends, both tax years of 2018-19 and 2019-20, did not require any tax on dividend income on the first £2,000 received because of the tax-free dividend allowance. The allowance was cut from £5,000 in the 2017-18 year.
The ISA limit for the 2020/21 tax year remains the same at £20,000 but it is important that individual’s take full advantage of this in each tax year.
For help with tax planning please contact us.