For IHT planning purposes, does the tax year end have any relevance?
In many cases, IHT planning involves reducing the estate by gifting. The IHT code offers a range of exemptions, some of which are tax year sensitive. For example, the annual £3,000 exemption and the small gifts exemption of £250. Using IHT exemptions to fund contributions to other people's pensions is explored in the 'Inheritance tax and pensions' article. In an ideal world, IHT planning should be undertaken sooner rather than later and larger gifts should be made as soon as possible so that the 'seven year clock' starts ticking.
My client has realised a bond gain - are there any tax year end planning opportunities?
For those clients who have realised a chargeable event gain on an insurance bond in this tax year, then a relief at source personal pension contribution will have the effect of extending the basic rate band by the gross contribution. A relief at source contribution made in this same tax year could prevent a top sliced gain from breaching the higher or additional rate threshold.
My client has an uncrystallised capital gain - are there any tax year end planning opportunities?
You can use the Capital Gains Tax (GGT) Annual Exempt Amount (AEA) to manage the gains that they will face year on year. You have to be careful when reinvesting the money to avoid “bed and breakfasting” (as detailed below). However, you have an annual AEA of £12,300 for 2020/21 that can be used to mitigate the cost of CGT. This amount can be used for any asset subject to CGT and you pay no CGT on any gain within the AEA.
If your client has any losses from this or previous tax years, this must be used first before the AEA is then used.
What is meant by the term bed & breakfasting in the context of tax planning?
The term bed and breakfasting is used generally to cover arrangements in which a person sells shares or units only to buy back those of the same class a short time later. The purpose is to create a disposal for capital gains tax purposes but to regain ownership. This may be to realise a loss, which can then be set off against other gains or establish a higher base cost for the asset. TCGA 1992 S105(1) however provides that a disposal must be identified with the acquisition of share/units of the same class within 30 days. This has the effect of reducing or eliminating the gain or loss which would have arisen if the disposal had been identified with shares already held.
Are there situations when the 'bed & breakfasting' anti avoidance rules do not apply?
The rules do not apply in the following situations
Repurchase after 30 days
Repurchase of non identical shares/units
Repurchase made by spouse
Repurchase within an ISA, pension or insurance bond
If my client is impacted by a tapered annual allowance for 2020/21, can they still carry forward? And if so, do we have to work out a tapered allowance for the earlier 3 years?
There is no change to the carry forward rules. Where your client will exceed their tapered annual allowance for 2020/21, you would check for any unused annual allowance from the three previous tax years (providing the client was a member of a pension scheme in those years). If the tapered annual allowance applied in any of the three earlier years then you would check if there was any of the tapered annual allowance unused or, if it didn't apply, any carry forward based on the notional amount of £40,000. All that can be carried forward is the unused tapered annual allowance even if they didn't make a pension contribution.
My client's adjusted income will exceed £240k, do I still need to calculate their threshold income?
We would look at this the other way around. You should calculate the threshold income first. If the threshold income does not breach £200,000 then they would not be impacted by the tapered annual allowance rules. It is only where the threshold income exceeds £200,000 that you need to determine if the adjusted income figure exceeds £240,000, as both limits must be exceeded for the tapered annual allowance to come into effect.
When is an individual pension contribution eligible for tax relief?
The short answer is, in the tax year in which it is paid. But to be more specific, it is the "contract made date" that determines the tax year in which a single contribution or a first regular contribution is paid, and this is the later of;
1. The date of signing of the fully completed application form,
2. The date of commencement of the policy, and
3. The date of receipt of the application form, payment method (i.e. cheque or DDI) AND full money laundering requirements. However, where the application form is incomplete, the "contract made date" will be the date of receipt of the last piece of information we need in order to process the application.
All of these dates must be 5th April or earlier AND for payments by cheque, the cheque must be presentable to and honoured by the bank, for the current tax year status to apply.
My client is a higher rate tax payer but their income is only made up of dividends and bond gains. Can they pay a large pension contribution to reduce their tax bill?
Tax relief is limited to 100% of relevant earnings or £3,600, whichever is greater, in the tax year the contribution is paid. Neither dividends nor bond gains are relevant earnings so this client would only receive tax relief on a pension contribution of up to £3,600 gross and they are under age 75.
When is an employer pension contribution eligible for tax relief?
Tax relief on employer contributions is given by allowing contributions (which satisfy the wholly & exclusively rule) to be deducted as an expense when calculating their profits.
Deductions are usually only allowed in the chargeable period (i.e. the company's financial year) in which the contributions are paid. For an employer pension contribution to be paid it must have actually been paid with the monies cleared; having an 'accounting entry' i.e. an accrued liability for the payment is not sufficient.
This differs from the rules applying to individual pension contributions which only require the payment method to be received by tax year end, rather than actual cleared funds.