Year End Tax Planning Guide
Our Year End Tax Planning Guide presents your tax-saving options, clearly and quickly for you to get ahead of the looming deadline.
Year End Tax
2021 / 22
Managing your wealth and tax profile requires regular review and revision. Striking a balance between managing risk and maximising your personal wealth is complex. Where you also have business interests, combining these considerations with your personal planning will add further challenges. Our team will work with you to make sure that we consider all of the various factors influencing and impacting your decisions, so that you are able to plan with clarity and certainty.
In this guide, we provide key pointers to consider as you review your affairs ahead of the tax year end. We encourage you to take some time to reflect on your needs now and in the future so that you are able to plan ahead and ensure the right long-term structures are in place.
Unless otherwise specified, the tax rates used are those for the tax year to 5 April 2022 (2021/22). There are different rates of Income Tax in Scotland, which are highlighted where appropriate. Current tax rates, reliefs and allowances may be subject to change as the Chancellor continues to review the position with regards to the Coronavirus pandemic. We will revisit and revise this guide accordingly.
Due to the complex nature of many of the issues raised within this guide, it is intended as an outline only. You should always take advice from appropriate professionals before making any changes to your wealth or tax profile.
If you are a tax resident in England and Northern Ireland you pay Income Tax at the following rates on your taxable income (i.e. your income above the Personal Allowance):
Income (excluding dividends)
£0-37,700 (Basic rate)
£37,701 - £150,000 (Higher rate)
£150,001 + (Additional rate)
For 2021/22, there is no difference between the Welsh rates of tax and the main UK rates of tax above.
For Scottish taxpayers, the rates of tax on their taxable income for 2021/22 are:
£1 - £2,097
(The starter rate of tax)
£2,098 - £12,726
(The basic rate of tax)
£12,727 - £31,092
(The intermediate rate of tax)
£31,093 - £150,000
(The higher rate of tax)
(The top rate of tax)
Every UK resident taxpayer is entitled to a tax-free Personal Allowance which is £12,570 for 2021/22. Your Personal Allowance reduces (down to a minimum of £0) when your income exceeds the current limit of £100,000.
You lose £1 of the allowance for every £2 of income over that limit. For example, if your taxable income is £125,140, your Personal Allowance is reduced by £12,570 (i.e. your Personal Allowance would become £0). This means that if your income falls between £100,001 and £125,140 you have an effective rate of tax rate of 1½ times your usual rate of tax (within that banding you are effectively paying 48.75% tax on dividends, or 60% tax on other income).
You will have no Personal Allowance where your income exceeds £125,570.
Tax Tip | Spend to save tax
If your income falls above one of the thresholds, you might want to consider reducing your tax liability through tax-efficient spending. There are several ways you can do this such as: making pension contributions; tax-efficient investments; or Gift Aid charity donations.
Tax Tip | Personal Allowance transfer
Where your spouse or civil partner does not use all of their Personal Allowance, consider jointly electing to transfer an element to you (if you are a basic rate taxpayer) to reduce your family tax burden.
Tax Tip | Alter your income profile
Where possible, try to ensure that you generate sufficient income to fully utilise the Personal Allowance and basic rate band. This is not always possible, but potentially can be done through careful planning of the timing of: dividends from a private company; distributions from a trust; or income drawdowns from an investment bond.
Tax Tip | Avoiding the High Income Child Benefit
If you have children, it may be possible to rearrange income (as between spouses or civil partners) so that both incomes remain below the £50,000 threshold for High Income Child Benefit.
Non-UK residents are also entitled to a UK personal allowance if they:
A. hold a British passport,
B. are a citizen of a European Economic Area country (including countries in the EU as well as Iceland, Liechtenstein and Norway),
C. have worked for the UK government during the tax year, or
D. are eligible under a double tax agreement.
The first £2,000 of dividends are tax-free regardless of which tax rate band into which you fall. This relief is in addition to your Personal Allowance.
Dividends can be used as part of the reward strategy for a private limited company.
Tax Tip | Utilising the dividend allowance
Director-shareholders should always consider declaring a dividend of at least £2,000 per shareholder in each tax year to utilise the dividend allowance, provided their company has distributable profits available.
Tax Tip | Maximising dividends
Dividends are taxed at a lower rate than other income. Director-shareholders can often influence the level of salary and dividends when deciding how they are rewarded by their company as a director and as a shareholder.
Tax Tip | Family involvement
If you are a director-shareholder, you may wish to consider who else in your family could have shares, in order to make use of their allowances. This planning might also involve creating jointly-owned shares. Income from jointly owned assets is generally shared equally for tax purposes, regardless of whether the asset is owned in unequal shares. It is possible to submit an election to H M Revenue and Customs to split the income proportionally in line with the ownership of the asset.
Tax Tip | Research and Development
Dividends are not taken into account when considering the costs incurred in respect of director-shareholders who are involved in Research and Development activities, therefore consideration should be given to the level of salary
Note: See also the Health and Social Care Levy of 1.25% which applies from 6 April 2022.
Personal Savings Allowance (PSA)
If you pay tax at the basic rate of tax you have a PSA of £1,000, which means that the first £1,000 of savings income is tax-free.
If you pay tax at the higher rate the PSA is £500. If you pay tax at the additional rate of tax you are not given a PSA.
Starting Rate for Savings
The first £5,000 of savings income is taxed at the starting rate for savings, which is 0%. However, this is only available if you have low income, and is restricted where non-savings income exceeds the personal allowance (£12,570 for 2021/22).
Tax Tip | Changing your income profile
Whilst many director-shareholders find themselves ineligible to benefit from the starting rate for savings (due to the level of their other non-savings income) for those that are on low incomes, it is often possible to review the way that you are rewarded. Please refer to the section on dividends.
Health and Social Care Levy (HSCL)
HSCL will apply from 6 April 2022 and will add a 1.25% charge on earnings liable to National Insurance of an employer, employee or self-employed individual. An identical increase is to be applied to the rates of tax on dividends.
Personal Pension Contributions
(for higher rate and additional rate taxpayers)
If you are a higher or additional rate taxpayer (intermediate rate, higher rate or top rate for a Scottish taxpayer) you can save Income Tax by making personal pension contributions for the tax year.
You must have sufficient earned income (principally employment income or trading profits) to cover the personal contributions.
If you have no earned income, your annual personal contribution is capped at £2,880 (net of tax), with the government adding a tax-free credit of 20% on top of the contribution, taking it to £3,600.
You can typically contribute up to £40,000 per year (which includes employer and personal contributions) into a pension scheme.
- If you are already drawing down a pension from a Money Purchase (Defined Contribution) scheme, the £40,000 AA is replaced by a £4,000 Money Purchase Annual Allowance (MPAA).
* There are rules that taper (reduce) the AA available to you, based upon the concepts of ‘Threshold Income’ and ‘Adjusted Income’. These rules are complex but, in outline, the AA is reduced if your income in a tax year exceeds the Adjusted Income. The reduction is £1 for every £2 by which your Adjusted Income exceeds the limit (as shown), and the AA cannot be tapered below the minimum tapered AA (as shown).
If you have not made use of your full AA/MPAA in the preceding three years and were a member of a qualifying pension scheme in that time, you can utilise any such unused allowance in the current tax year.
If you are a member of a Final Salary (Defined Benefit) scheme the contributions to the scheme are determined by reference to the increase in the value of defined benefits not the contributions to the pension scheme.
If too much is paid in to your pension, you will be subject to an annual allowance charge, which is charged at your marginal (top) rate of tax.
|Minimum tapered Annual Allowance
|2016/17 to 2019/20
|2020/21 to 2021/22
Employer Pension Contributions
Employer Pension Contributions are extremely tax-efficient and can be an essential part of the reward strategy for directors and key employees. The company can make employer pension contributions on your behalf in order to maximise the AA (including any unused AA brought forward from the previous three tax years).
The company can claim tax relief on the employer contributions, provided these are not considered excessive, and you do not incur a tax charge if the relevant conditions above are met.
- The total value of your pension savings are subject to a Lifetime Allowance (LTA), currently £1,073,100 for 2021/22.
There is a tax charge on the value of the pension funds that exceed the LTA once you go in to drawdown.
However, you may be eligible for Individual Protection 2016, which can potentially elevate your LTA to £1.25m.
Once you turn 55, you can take out 25% of your pension fund tax-free (with fund value capped at the LTA for these).
You now have more flexibility with how you can access your pension fund once you turn 55 (i.e. you do not have to buy an annuity).
For example, you can take it all out as a lump sum or spread your drawings over more than one tax year, and decide on how much you draw each year.
However, you need to consider the potential tax implications of drawing large amounts from your pension fund as these are generally taxed as income when they are drawn.
Pension Planning for Your Family
You can make personal contributions on behalf of your family, with the contributions going to their respective pension funds.
This can include your children, grandchildren and members of your family who are not working.
Where they have no earnings, you can make yearly contributions of £2,880 for each individual, with the government adding a tax-free credit of 20% on top of the contributions.
A long-term benefit with building up a pension fund is that the value of the fund is typically not liable for IHT at 40%.
The pension funds can be transferred to the beneficiaries free of IHT. You must ensure that you have nominated who inherits your pension fund.
The beneficiaries will be liable to Income Tax if they subsequently draw funds from the pension fund. However, there is no Income Tax charge if you, as the pension fund holder, die before the age of 75.
If the total of all your pension funds is likely to be at or near £1m by the time you retire, you should seek advice on your options.
If you were already in flexible drawdown prior to 6 April 2015, you can move to the new, unlimited regime and draw more income than the current maximum, however that can lead to restrictions on further contributions (see MPA above).
Capital Gains Tax (CGT) Annual Exemption
It is important to remember that you have an annual exemption for the tax year which is £12,300 for 2021/2022.
This is a “use it or lose it” exemption, so it is not possible to carry it forwards.
Married couples & civil partners
Married couples and civil partners can transfer assets between themselves at no gain/no loss, so it can be possible to crystallise combined capital gains of £24,600 without being subject to tax.
Capital gains are taxed by reference to your total taxable income. Gains are taxed at 10% to the extent that, when added to your taxable income, they do not exceed £37,700 for 2021/22.
Capital gains are taxed at 20% to the extent that, when added to your taxable income, they exceed £37,700 for 2021/22.
Residential Property – different rates of tax
The standard and higher rates for gains on residential property are 18% and 28% respectively.
It is also important to note that tax on residential property gains is now payable within 60 days of completion of the sale, as from 27 October 2021 (within 30 days for sales completed prior to that).
Business Asset Disposal Relief 10%
Gains qualifying for Business Asset Disposal Relief (previously Entrepreneurs’ Relief), up to a lifetime limit of £1 million, are taxable at 10%.
The annual exemption for 2021/22 is £6,150. Gains above this are taxed at 20% or 28% if in relation to residential property.
Investors’ Relief enables shareholders to benefit from a 10% rate of CGT up to a lifetime limit of £10m. Investors’ Relief is only available to investors in qualifying shares of an unlisted trading company (or the holding company of a trading group) for investors who are not employees involved in the running of the business.
Tax Tip | Use the exemption
The annual exemption cannot be carried forward or transferred, so aim to make disposals on or before 5 April each tax year in order to use that year’s exemption.
Tax Tip | Timing and use of the standard rate band
The timing of a disposal may affect the amount of CGT payable. For example, if you are a lower rate tax payer in a tax year but expect to be a higher rate tax payer in the next tax year, realising a disposal when you are a lower rate taxpayer may reduce the CGT payable.
Tax Tip | Losses
Capital losses must be offset against capital gains in the same year or carried forward to offset against future capital gains above the annual exemption. Careful timing of the disposals of assets which will realise losses can reduce future Capital Gains Tax liabilities. Where losses arise, a formal claim is required and must be submitted to H M Revenue & Customs within four years of the end of the tax year of the loss.
Tax Tip | Transfers
Capital assets that might be sold can potentially be transferred to, or split with, spouses or civil partners who can utilise their own annual exemption and standard rate band.
When you are considering transferring an asset to a spouse or civil partner it is important to note that, if that asset generates income, they will be taxable on that income from the date of transfer.
CGT is not be the only consideration. Transacting in capital assets potentially has various other implications including both transaction costs and the impact that a disposal may have on the balance and overall risk profile of your investments.
Inheritance Tax (IHT)
IHT is payable at 40% if your net Estate on death totals more than the tax exempt bands:
Nil Rate Band (NRB) £325,000
Residential Nil Rate Band (RNRB) £175,000
The RNRB is available where, on your death, your main residence passes to direct descendants.
There are rules to preserve the relief where, for instance, you ‘downsize’ and retain the additional capital. Careful planning and record-keeping is required.
For Estates in excess of £2m, the RNRB is reduced by £1 for every £2 that the net estate (before any reliefs or exemptions) exceeds £2m.
Net Estate & IHT liability
The Net Estate and liability to IHT take into account:
- The value of the assets at the date of Death.
- The value of any liabilities at the date of Death (e.g. loans, mortgages, Income Tax).
- The value of any gifts made in the seven preceding years.
- The amount, if any, of IHT reliefs and exemptions available.
- The amount, if any, of the Estate or gifts passing to a spouse or civil partner.
- The NRB.
- The RNRB.
- Any NRB or RNRB available from a deceased spouse’s Estate.
Each individual will have a maximum combined NRB/RNRB of £500,000.
IHT can be often be reduced, and potentially reduced to £0, through careful and timely planning.
In considering IHT planning, your Will must be considered in conjunction with appropriate lifetime IHT planning, and must also take into account your income and capital requirements.
Spouses and civil partners
Spouses and civil partners are chargeable to IHT separately, so the available exemptions apply to each of them separately.
Spouses and civil partners can make transfers to each other, in their lifetime and on death, free of both IHT and CGT.
The percentage of any unused NRB and/or RNRB on first death is transferred to the surviving spouse or civil partner, to be used in calculating the IHT payable on the death of the survivor. The combined available nil-rate bands on the death of the surviving spouse or civil partner could therefore be up to £1m.
Lifetime Giving - General
Care is needed when considering lifetime giving.
- Deprivation of assets – gifts made in contemplation of avoiding contributions to Local Authority residential care costs can be subject to challenge and thereby be ineffective for those purposes.
- Gifts With Reservation of Benefit – gifts are typically not effective for IHT purposes where the donor either continues to enjoy the use of the asset or starts to enjoy use of the asset again before death.
- Immediate charge to IHT – certain gifts, typically gifts to a trust, are chargeable lifetime transfers (CLTs) and can give rise to an immediate charge to IHT.
- Maintenance of income and lifestyle – when contemplating making lifetime gifts, consideration must be given to whether you have retained sufficient income and capital to preserve your desired lifestyle.
- Capital Gains Tax (CGT) – most lifetime gifts of assets (other than cash) must be considered in conjunction with CGT. A gift is not a ‘bargain at arm’s length’ for CGT purposes and therefore is treated as a disposal by the donor at market value. Reliefs can sometimes be available to defer the CGT arising.
Lifetime Giving - Potentially Exempt Transfers (PET)
- Where you make a gift that is not a chargeable lifetime transfer (CLT), the transfer will represent a PET for IHT purposes.
- If you live for seven years or more from the date of the gift, the asset gifted will not form part of your Estate for IHT purposes.
- Taper relief is available if you die between three and seven years from the date of the gift, but only where the gift then gives rise to an IHT liability.
- It is important to select suitable assets for gifting to maximise the potential tax savings.
Trusts can be a useful mechanism to protect assets and beneficiaries, and can be created and utilised both in your lifetime and on death.
Gifts to trusts are Chargeable Lifetime Transfers, but placing appropriate assets into trust (for instance those that are valued below the available NRB, and/or those that attract IHT reliefs) can be extremely tax efficient.
It is important to note that many trusts have an obligation to submit annual Income Tax returns and pay Income Tax, and can also be liable to make IHT returns and pay IHT every ten years.
When considering IHT planning, it is important to consider the IHT reliefs and exemptions available. The main exemptions and reliefs are explained below:
Exemption - Small Gifts to the Same Person
Any outright gifts to any one person in a tax year are exempt from IHT if the total gifts to that person do not exceed £250 in that year.
Small gift exemption applies separately to each donee. It does not matter how many different donees there are, as long as each is given no more than £250 in a tax year.
If the gifts to any one donee in the same tax year exceed £250, the exemption is wholly lost in relation to that donee.
Exemption - Annual Gifts
For transfers exceeding the Small Gifts exemption, the first £3,000 of gifts in a tax year are exempt from IHT.
Any unused amount of this annual exemption can be carried forward but only to the next tax year.
Relief - Business Property Relief (BPR)
BPR is one of the most important IHT reliefs available as it reduces the value of certain transfers liable to IHT by either 50% or 100%.
BPR can be claimed either on death or on any other chargeable event – i.e. on a CLT or on a PET becoming chargeable.
BPR applies to the value of qualifying assets, such as: shares in an unquoted trading company; a business or an interest in a business; assets used wholly and mainly for the purposes of a business.
Relief - Agricultural Property Relief (APR)
APR applies to assets such as farmland and farm buildings gifted either during lifetime or on death. As with BPR, it reduces the value of certain transfers liable to IHT by either 50% or 100%.
Exemption - Normal Expenditure Out of Income
To obtain this exemption, you (or the executors of the Estate) must show that: a gift formed part of your normal expenditure; was part of a pattern of such giving; was made out of income; and you were left with enough income to maintain your lifestyle.
We recommend keeping detailed records to support a claim in the future.
The value of funds in a registered pension scheme is typically not subject to IHT on your death.
The accumulation of pension funds therefore represents an opportunity for IHT planning.
Tax Tip | Gifting now
Start the seven-year PET ‘clock’ running by gifting assets during your lifetime to minimise the IHT payable on your death.
Tax Tip | Surplus income
If you have surplus income, consider making use of the exemption for (gifts) as normal expenditure out of income.
Tax Tip | Pension funds
Consider making additional contributions to your pension scheme. Additionally, consider exhausting other assets/investments during your lifetime instead of drawing from your pension fund, thereby leaving the pension fund as intact as possible.
Tax Tip | Wills and Powers of Attorney
Review your Will and Powers of Attorney regularly to ensure that they meet your requirements as effectively and tax efficiently as possible.
Tax Tip | ‘Skipping a generation’
It is not unusual for children to be independently wealthy, such that assets gifted to them will simply be retained and passed to their own children. In such circumstances, ‘skipping a generation’ and passing assets direct to (say) your grandchildren can avoid the assets being subject to IHT in the hands of your children.
Tax Tip | Deeds of Variation
It is possible to vary a Will within two years of death. This can be valuable in redirecting assets to maximise IHT reliefs and minimise future IHT liabilities.
Profits from rentals are subject to Income Tax at your marginal rate of tax.
Expenses incurred wholly in connection with the rental business are deductible when calculating net taxable profits, providing they are not capital in nature.
The rules for determining whether an expense is capital or revenue in nature are not always straightforward.
Tax relief on finance costs for individuals and partnerships that let residential properties has been withdrawn, and now relief for finance costs is only provided as a basic rate tax reduction.
This effectively means that only basic rate tax taxpayers can obtain full relief for these types of costs – other taxpayers suffer additional tax.
Capital Gains Tax (CGT) – payable in 60 days
Individuals, trustees and personal representatives are required to report and pay CGT on the disposal of UK residential properties within 60 days of completion of the sale, as from 27 October 2021 (within 30 days for sales completed prior to that).
In addition, non-residents are also required to report and pay CGT on disposals of commercial property within the same time limits.
Where properties are held jointly or in partnership, each owner is required to submit a return (and pay the tax) in respect of their share of the disposal. Penalties will apply if the return is filed late.
The amount to pay is based on an estimate of the tax payable. This will be treated as a “payment on account” against your total Income Tax and CGT liability for the tax year for which your annual self-assessment tax return is submitted.
H M Revenue & Customs has created a facility where you can report the disposal and pay the tax by creating a ‘Capital Gains Tax on UK property account’.
There are exceptions where the gain is covered by losses or your annual exemption for the year of disposal.
Stamp Duty Land Tax (SDLT)
SDLT is payable on property transactions by the purchaser and is calculated based on the consideration.
From 1 October 2021, the rates are as follows:
Property or lease premium
or transfer value
Up to £125,000
£125,001 to £250,000
£250,001 to £925,000
£925,001 to £1,500,000
A surcharge of 3% applies to: individuals who already own residential property; limited companies; and trusts.
There are different bands and rates in Scotland.
There are reliefs from the surcharge in limited circumstances.
Different rates apply for first time buyers if purchasing a property for £500,000 or less.
Private Residence Relief (PRR)
PRR provides full or partial relief on the gain on the sale of a property where you have occupied it as your principal private residence at some point during ownership.
The relief is only attributable to gains for periods during ownership where it was used as your main residence.
Where a property has been your main residence, the last 9 months of ownership before the sale is treated as qualifying for PRR regardless of whether it is actually occupied as such.
Relief is also available for periods in which your main residence is let, but this only applies where the property is occupied by you and let to a lodger.
Furnished Holiday Letting (FHL)
There are special tax rules for rental income from properties that qualify as FHL.
If you let properties that
qualify as FHLs:
you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Business Asset Disposal Relief, and relief for gifts of business assets) and Income Tax relief on loans to traders;
you are entitled to claim Plant and Machinery capital allowances for items such as furniture, equipment and fixtures;
the profits count as earnings for pension purposes.
To be classed as a FHL the lettings must constitute ‘the commercial letting of furnished holiday accommodation’ in the UK or in the European Economic Area (EEA), as well as the following additional conditions:
- ‘the availability condition’ - the accommodation must be available for commercial letting to the public generally as holiday accommodation for a minimum of 210 days during the tax year;
- ‘the letting condition’ - the accommodation must actually be commercially let as holiday accommodation for a minimum of 105 days during the tax year (ignoring ‘periods of longer term occupation’); and
- ‘pattern of occupation condition’ - during the tax year, there must not be more than 155 days falling in ‘periods of longer term occupation’. A ‘period of longer term occupation’ is a continuous period of more than 31 days during which the accommodation is in the same occupation.
Where property is let as ‘holiday accommodation’, which includes both FHL and other types of holiday letting, the income is a ‘taxable supply’ for VAT purposes. Care is therefore needed to ensure that you comply with the VAT legislation - currently the threshold for compulsory VAT registration is £85,000 of ‘taxable supplies’ in any 12 month period. You may need to consider the value of your holiday accommodation income in conjunction with other income that you may have where that income also qualifies as a ‘taxable supply’.
Annual Tax on Enveloped Dwellings (ATED) - where residential property is not owned personally
ATED is a tax charge on companies, and on Limited Liability Partnerships which have a corporate member, that own UK residential property valued at more than £500,000.
The tax charge varies depending on the value of the property held.
Returns must be filed and the tax paid at the beginning of the relevant tax year, by 30 April. If the property is disposed of during the tax year then a claim for a refund can be made.
There are several reliefs from the ATED regime which can be claimed in certain circumstances including, those applying to property developments and properties let to third parties on a commercial basis.
A change in use of a property may mean you will need to file an amended ATED return.
Tax Tip | Buying new properties through a limited company
Buying new properties through a limited company (potentially combined with the use of a Family Investment Company), particularly where the intention is to build a long-term investment portfolio, can be tax efficient as it avoids the finance cost restriction and can have other benefits.
Tax Tip | Transferring existing properties to a limited company
This can trigger an immediate charge to SDLT and CGT, and may require the cooperation of any lenders involved, therefore it requires careful consideration and planning.
Tax Efficient <br>Savings & <br>Investments
Tax Efficient Savings & Investments
Tax efficient investments offer you relief from one or more taxes - Income Tax, Capital Gains Tax and Inheritance Tax. Each type of investment has its own set of qualifying conditions which must be satisfied by you. Some of these investments require that the company seeking investment also meets qualifying conditions.
Individual Savings Account (ISA)
The ISA limit for the 2021/22 tax year is £20,000. This limit cannot be carried forward therefore, if you fail to utilise the full allowance, it will be lost.
There are various types of ISAs (such as Junior ISA, Help-to-Buy ISA, Lifetime ISA).
Junior ISAs are available for all UK resident children under 18 years of age. Up to £9,000 can be invested in 2021/22 on behalf of a child (by parents, grandparents, relatives or friends). No withdrawals are permitted until the child reaches 18.
Generally, if you give money to your own children, the interest earned must not exceed £100 per tax year, otherwise you will be subject to tax on the income at your marginal tax rate. However, Junior ISAs are excluded from this rule.
Tax Tip | Pension Annual Allowance already maxed out?
Where you have already utilised your pension Annual Allowance, ISA investments may offer any appropriate alternative.
Consider making full use of your ISA allowances before the end of the tax year.
The ISA wrapper is a useful tool for a higher rate taxpayer, since any growth will be free of income tax and capital gains tax.
Seed Enterprise Investment Scheme (SEIS)
The SEIS is designed to encourage individuals to invest in shares issued by qualifying, unquoted companies established in the United Kingdom.
The scheme is specifically designed for small, start-up trading companies.
There are various conditions that a company and you must satisfy for a certain period of time.
A company can raise a maximum of £150,000 through SEIS investment, but there are no tax reliefs available to a qualifying company that is seeking investment.
The tax reliefs are given to you. You can invest up to £100,000 per tax year. You receive Income Tax relief of up to 50% of the amount invested. The relief can be claimed against the current year and/or previous year’s Income Tax liability. Where SEIS shares are sold after three years any gains should be exempt from Capital Gains Tax but only if you made an Income Tax relief claim.
The SEIS also offers another form of Capital Gains Tax relief. If you dispose of any asset which results in a chargeable gain and then re-invest all or part of the amount of the gain in shares which qualify for SEIS relief, 50% of the amount invested, up to £50,000 of the original capital gain, may be exempt from CGT.
The value of SEIS shares would be exempt from Inheritance Tax after being owned for two years.
Enterprise Investment Scheme (EIS)
The EIS is similar to SEIS and, again, there are various conditions of the scheme that a company and you must satisfy for a certain period of time.
A company can raise up to £12m, and a Knowledge Intensive Company can raise up to £20m, under the EIS scheme.
You can invest up to £1m in a tax year or £2m if the company is a ‘Knowledge Intensive Company’. Your tax liability will be reduced by 30% of the sum invested. Relief can be claimed against the current year and/or previous year’s Income Tax liability.
For EIS shares sold after three years, any gains should be exempt from Capital Gains Tax but only if you made an Income Tax relief claim.
The value of EIS shares would be exempt from Inheritance Tax after being owned for two years as they qualify for Business Property Relief.
EIS also offers another form of Capital Gains Tax relief whereby a Capital Gains Tax liability can be deferred on any asset where the gain is invested in the shares of an EIS qualifying company in the twelve months before or three years after the disposal.
Social Enterprise Tax Relief (SITR)
If you subscribe for equity or for a debt instrument issued by a ‘Social Enterprise’, you are entitled to Income Tax relief of 30% of the amount subscribed. A Social Enterprise means a ‘Community Interest Company’, ‘Community Benefit Society that is not a charity’, or ‘a charity’.
The maximum subscription by you is £1m in a tax year.
You can make a claim to carry back relief to the tax year preceding the year of investment. If the investment is a subscription for shares then any gain realised on the disposal will not be subject to tax provided certain conditions are met.
As with EIS, SITR offers another form of Capital Gains Tax relief whereby a Capital Gains Tax liability can be deferred on any asset where the gain is invested in the shares of a SITR qualifying company in the twelve months before or three years after the disposal.
Understanding UK residency and tax rules will reduce unforeseen tax impacts on you and enable you to plan your tax affairs effectively. A UK tax resident is typically liable to tax in the UK on their worldwide income and gains as they arise.
Tax Tip | Non-residents
(including trusts and companies)
If you are non-resident with a UK source income, UK tax may still be due. This depends on the nature and amount of income.
The Statutory Residence Test (SRT)
The rules relating to this involve checking a number of different factors, which hinge on the number of days a person spends in the UK during a tax year.
There are three sets of tests to consider
If you have spent 183 days or more in the UK in any tax year, you are a tax resident in the UK in that year. If not, you must work your way through the tests in order. Once you meet the requirements of a test, you do not need to consider any of the subsequent tests.
Each set of tests has various elements including:
- employment/work status (overseas or in the UK)
- location of your primary or only home
These are calculated on the number of days in the UK in a given tax year.
The Sufficient Ties test assesses residency based on the number of UK connections or ties an individual has and the number of days spent in the UK – the more ‘ties’ you have to the UK, the fewer days you can spend in the UK without becoming UK tax resident.
Tax Tip | Leaving the UK
If you are planning to move to or from the UK, ensure that you are familiar with the rules that trigger residence, and allow sufficient time to undertake necessary planning for different tax regimes.
Your liability to UK tax can sometimes be impacted by your domicile status.
The rules around domicile status are somewhat antiquated. There are four basic concepts:
- Domicile of origin – usually this is the same domicile as that of your father at the time you were born.
- Domicile of dependence – applies to a person under the age of 16, who takes the domicile of the person upon whom they are legally dependent.
- Domicile of choice – although technically very difficult to achieve, you can change your domicile of origin by taking actions to permanently sever your ties with that country.
- Deemed domicile – in the UK, you are deemed domiciled in the UK for Income Tax, Capital Gains Tax and Inheritance Tax purposes once you have been UK resident in at least 15 out of the last 20 tax years.
Non-domiciled individuals (non-doms)
Non-doms may, in certain circumstances, be able to elect for their non-UK income to be taxed on a ‘remittance’ basis rather than on the standard ‘arising’ basis.
If deemed domiciled, you are taxed on your worldwide income and capital gains on an arising basis.
Some protections are provided for trusts set up before an individual becomes deemed domiciled.
UK resident non-domiciles who are not deemed domiciled can chose, from one year to the next, whether to be taxed on worldwide income and gains as they arise or to claim the remittance basis of taxation.
Those who qualify for the remittance basis must pay an annual Remittance Basis Charge (RBC).
There are two levels of RBC, depending on the length of time you have been UK resident:
Tax Tip | Planning remittances
If you are thinking about claiming the remittance basis, you need to plan when and how you remit funds to the UK. Ultimately, claiming the remittance basis can result in higher UK tax liabilities.
Tax Tip | Length of time in UK
You may need to plan in advance as you near either of the RBC thresholds or deemed domiciled threshold.
Tax Tip | Cryptoassets
If you are non-domiciled and own crypto assets, it is worth seeking specialist advice on the tax implications as some cryptoassets may be deemed not to be UK assets.
Tax Tip | Loan security
Be careful when using overseas income or gains as security for a loan - this can trigger a taxable remittance to the UK.
Residence, Domicile and the Coronavirus Pandemic
There has always been a special rule for days spent in the UK because of exceptional circumstances, which are defined in the Finance Act 2013 as including “national or local emergencies such as war, civil unrest or natural disasters” and “a sudden or life-threatening illness or injury”.
For you to benefit from the rule, the exceptional circumstances that prevent you from leaving must be beyond your control and you must make every effort to leave the UK as soon as the circumstances permit.
H M Revenue & Customs published guidance on this matter on 19 March 2020, which outlines their position and is as follows:
"The Coronavirus (COVID-19) pandemic may affect your ability to move freely to and from the UK or require you to remain unexpectedly in the UK. Whether days spent in the UK can be disregarded due to exceptional circumstances will always depend on the facts and circumstances of each individual case."
However, the circumstances are considered exceptional if you:
are quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus.
find yourself advised by official Government advice not to travel from the UK as a result of the virus.
are unable to leave the UK as a result of the closure of international borders, or
are asked by your employer to return to the UK temporarily as a result of the virus.
In issuing the guidance H M Revenue & Customs has indicated that it will look sympathetically at any individual cases where the virus has caused specific issues or difficulties.
For many business owners, your personal wealth is inextricably linked to your business. Whilst the focus of this guide is on personal tax planning, we highlight key corporate tax considerations that may have an impact on your personal tax position.
Rate of Corporation Tax (CT)
The current rate of corporation tax is
The main rate of CT will increase to 25% from 1 April 2023 for companies with profits in excess of £250,000.
A Small Profits Rate of 19% will be introduced from 1 April 2023 for companies with profits under £50,000.
These thresholds are reduced pro-rata where there are ‘associated’ companies i.e. if there are two associated companies, the main rate and small profits rate would apply to profits of £125,000 and £25,000 respectively.
From 1 April 2023, the concept of ‘associated companies’ is reintroduced in order to determine the rate of Corporation Tax applicable.
A company is associated with another company at a particular time if, at that time or at any other time within the preceding 12 months:
- one company has control of the other.
- both companies are under the control of the same person or group of persons.
Extracting value for Directors and for shareholders
There are a number of factors to consider when reviewing the most appropriate and efficient method to extract profits from your limited company.
- Corporation Tax rates.
- Personal tax rates.
- Utilisation of spouse’s personal allowances.
- Dividend Allowance.
- Overall levels of personal and household income.
- Personal pension contributions.
- Employment Allowance.
- Involvement in Research and Development Activity.
- Exit strategy.
Tax Tip | Revisit the number of companies needed
For a number of years, the rate of Corporation Tax has been consistent across all companies and therefore owning/controlling multiple companies had relatively little impact on the CT liability. Consideration should be given as to whether it is now appropriate to reduce the number of companies required within a group or under common control.
Pension contributions are efficient for both the company and the employee.
For the employee it is a tax-free benefit (but care is needed not to exceed the Annual Allowance or Lifetime Allowance). For the employer, the contribution will usually be fully tax deductible for Corporation Tax purpose in the year that the contribution is paid.
Family Interest Companies (FICs)
FICs have increased in popularity over the last few years. Often they go by other names, but the principle is the same.
The basic structure of a FIC involves providing shares to family members. The FIC is then free to trade, make investments (e.g. rental property, investment portfolios) and generate profits from this.
The advantages of a FIC are:
Annual Investment Allowance (AIA)
AIA is currently £1m, reducing to £200,000 from 1 April 2023.
Qualifying capital expenditure can be relieved in full in the accounting period in which it is incurred.
From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will be able to claim:
- a 130% super-deduction capital allowance on qualifying plant and machinery investments.
- a 50% first-year allowance for qualifying special rate assets.
Structures & Buildings Allowance (SBA)
SBA may be claimed on qualifying expenditure incurred.
To be able to claim SBA, it is necessary for the structure to be used for a qualifying activity, which includes:
- any trades, professions and vocations.
- a UK or overseas property business (except for residential and furnished holiday lettings).
- managing the investments of a company.
- mining, quarrying, fishing and other land-based trades such as running railways and toll roads.
The costs included within the SBA claim would be the acquisition costs of a structure or the construction costs of building the structure. The cost of the land should not be included within the claim.
The rate for the SBA is 3%. It is not possible to claim AIA on expenditure that qualifies for the SBA.
Tax Tip | Plan your expenditure
The timing of capital expenditure is important to ensure that you maximise, and ideally do not exceed, the available allowances.
Tax Tip | Patent Box election
If your business qualifies for the Patent Box regime, you must make an election within specific deadlines, generally two years from the end of the relevant accounting period.
Research and Development
Research and Development tax relief is an incentive available to UK limited companies which encourages investment and innovation. The relief can reduce a company’s tax liability or, if a company is not in profit, provide a payable cash refund. Research and Development tax relief for Small and Medium Enterprises (SMEs) currently provides an additional allowance of 130% of a company’s qualifying R+D expenditure. For large companies and other companies unable to utilise the SME scheme, a tax credit of 13% is given for a company’s qualifying R+D expenditure. Claims can be made retrospectively, but a claim can only be made within two years of the year end.
A company may be able to claim a number of enhanced tax reliefs on a range of expenditure, which H M Revenue and Customs are trying to encourage.
Taking advantage of these reliefs can create funds which you can reinvest in your business. If you are a loss making business, in some cases you can surrender losses for a cash tax credit.
Patent Box Regime
The patent box provisions can be used to reduce tax for activities that result in a patented innovation.Effectively, a 10% tax rate can be applied to all profits attributable to products, processes or royalties that carry on or include a qualifying patent.
There is a raft of tax reliefs available specifically for the creative sector, which includes: films, animation, high end TV programmes, video games, theatres, orchestras, museums and gallery exhibitions. Qualifying conditions vary and you should therefore review in the context of your company’s activities.
Land Remediation Relief provides an additional tax deduction of 50% for qualifying expenditure incurred by companies in cleaning up land acquired from a third party, in a contaminated state.
Qualifying expenditure includes the cost of establishing the level of contamination, removing the contamination or containing it so that the possibility of relevant harm is removed. There is,however, no relief if the remediation work is not carried out.
Land Remediation Relief is available for both capital and revenue expenditure. However, the company must elect, within two years of the end of the accounting period in which the expenditure is incurred, to treat qualifying capital expenditure as a deduction in computing taxable profits.
A company that makes a loss can surrender that part of the loss that is attributable to Land Remediation Relief in return for a cash payment (a tax credit) from the Government.
Loss relief has been temporarily enhanced for both companies and unincorporated businesses – subject to various conditions, trading losses may be carried back for up to three years for losses arising from 1 April 2020 to 31 March 2022 (2020/21 and 2021/22 tax years).
This publication is designed as an outline guide only. There is a good reason for this – there are any number of instances where:
a specific tax or transaction cannot be considered in isolation because it overlaps with other areas of tax;
there are a myriad of inter-related rules that can prevent tax relief from being obtained or can create unexpected tax liabilities.
Whilst by no means an exhaustive list, here are just a few of the areas where tax problems can arise:
- transactions involving shares in unlisted companies.
- parents passing income generating assets to minor children.
- transactions caught by H M Revenue & Custom’s General Anti-Abuse Rule (GAAR) or Targeted Anti-Abuse Rule (TAAR).
- transactions caught by the Settlement Provisions (where value is given up in order that another person may benefit from that value).
- Value Shifting (diminishing the value of an asset such that another person’s asset gains in value).
- directly or indirectly passing value to employees.
- transactions between connected persons.
The difficulty is that the legislation is drawn up so as to attempt to prevent its misuse – unfortunately that often results in long and complex legislation which creates restrictions not originally intended or foreseen when the legislation was drafted.
We are here to help you navigate through these complex rules in order to help you achieve your desired outcome."
Publication Date: November 2021. Haines Watts and The Haines Watts Group generally refer to the network of member organisations, each of which is a separate and independent legal entity. Each entity has signed a participation agreement with Haines Watts Limited, or is controlled by such a firm. Member organisations are not members of one legal entity and are only liable for their own acts and omissions, and not those of each other. © Haines Watts Limited. All rights reserved. All published material remains the property of Haines Watts Limited and is replicated with the permission of Haines Watts Limited. Disclaimer - for information of users: This Guide is published for information purposes only. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained herein can be accepted by the authors or the firm. All content is correct as of publication date.