Tax year-end countdown: Are you prepared?
The end of the financial year is a good time to review your finances and make sure you’re on track to meet your short- and long-term goals. If you’re a UK taxpayer, you should also think about how you can make the most of your pension and ISA allowances, as well as about any taxes you might owe or donations you want to give.
Here’s a brief overview of what you should be thinking about this month:
If you haven’t used your annual personal or individual savings account (ISA) allowances this tax year, you can still make contributions before 5 April 2023. Under normal circumstances, the annual pension allowance is £40,000 including basic rate tax relief. The annual personal allowance is £12,570 and is frozen at this level until 2027/28. You can pay £20,000 into your ISA annually. If you sell any stocks or shares, your tax-free capital gains allowance is £12,300, although this will fall to just £6,000 in 2023/24. If you own a company and pay yourself in dividends, your tax-free allowance is currently £2,000. In certain circumstances, you may carry forward pension allowances from up to three previous years.
While giving money or assets in the UK usually falls within the scope of inheritance tax regulations, certain exemptions are available:
- There is an annual tax-free gift allowance of £3,000
- Parents may contribute up to £5,000 towards a child’s wedding
- Grandparents and great-grandparents can also give wedding gifts of up to £2,500, while non-relatives can give up to £1,000
- You can make as many gifts as you like of up to £250 per person each year (subject to no other allowance being used by the recipient)
- Gifts exchanged between spouses or civil partners in the UK are usually exempt from inheritance tax
- Gifts to political parties or charities are also exempt
- Regular gifts from surplus income that do not affect standard of living
Investing for children
If a child earns more than £100 in interest from their bank account in a financial year, the parents are responsible for paying any tax due. If you open a junior ISA in their name, however, the interest is tax-free. Once the child turns 18, the junior ISA will automatically convert into an adult ISA in their name and the funds will remain tax-free. The junior ISA allowance for the current tax year is £9,000 per child.
If you donate to charity and the gift qualifies for Gift Aid, you will receive tax relief and the charity can claim an extra 25% from the government. For example, if you’re an additional-rate taxpayer and you make a Gift Aid donation of £20,000, the charity can claim another £5,000 from the government. You will then benefit from £6,250 in tax relief. The charity receives a total of £25,000, while the net cost to you would only be £13,750. The timing of the donation is important because it will determine the tax years in which you can claim relief.
Capital gains tax on property for UK residents
If you sell a UK residential property that’s not your main home, you will have to pay capital gains tax on the profit you make from the sale. There is currently a small tax-free allowance of £12,300, but this will reduce to £6,000 in 2023/24 and £3,000 the following year.
If you’re a higher- or additional-rate taxpayer, you will pay 28% CGT on any gains from residential property. If you pay the basic rate of income tax, the rate you pay will depend on the size of the gain and your taxable income. You will then pay between 18% and 28% on the gain.
If you have to pay tax, you must report it and pay it within 60 days of the completion date.
How does UK property tax affect non-residents?
CGT on commercial property held by non-residents
Since 6 April 2019, disposals of UK commercial property by non-residents have been subject to UK CGT. However, property that has been affected by this change will be rebased to reflect its value on 5 April 2019. So, if you sell the property now, you will not pay tax on the gain that accrued before this date. If you have been affected by this change, you could obtain an independent valuation to calculate a future capital gains liability.
Reporting and paying capital gains tax for non-residents
If you are not resident in the UK but sold UK property or land after 27 October 2021, you must report and pay non-resident CGT within 60 days of completing the sale. To do this, you must use a capital gains tax on UK property account. When you report a disposal, you should include a computation of your taxable gains and losses along with your return. The rate of CGT will be either 10% or 20% on commercial property or 18% or 28% for residential property, depending on your level of taxable income. Non-residents do not pay tax on other capital gains.
Additional stamp duty for non-residents
Since 1 April 2021, non-resident buyers of UK residential property have had to pay stamp duty at a higher rate than residents. This two per cent applies to purchases of freehold and leasehold property, and it also applies to certain UK-resident companies that are controlled by non-residents.
Do non-domiciles residing in the UK have to pay income tax?
People temporarily residing in the UK who earn money from work abroad, foreign investments or rental income from property overseas may need to pay UK income tax. Non-residents do not have to pay UK tax on foreign income (just UK income), so you will only be liable if you’re classed as a UK resident for tax purposes.
You may be classed as a UK resident for tax purposes if you spend more than 183 days in the UK in a single tax year, your only home is in the UK for more than 91 consecutive days, and you work full-time for any period of 365 days with at least one day in the relevant tax year.
Please get in touch if you’d like to speak to one of our financial planners today.
The information contained in this publication does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action.
Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change.