With the end of the UK tax year fast approaching, we highlight some key areas of personal finance that you may want to consider before 5 April 2023.
Swaati Osborne, Head of Wealth Planning, LGT Wealth Management US
If you are a UK tax resident individual, you may want to consider maximising your ISA contributions if you have not already done so.
ISAs are not subject to any UK income or capital gains tax. Income and gains will still be taxable in the US but, whilst tax rates remain higher in the UK (especially with the reduction in capital gains allowance from the next tax year), there exists benefits to funding an ISA each year.
Personal contributions to a pension benefit from income tax relief (basic rate tax at source and further relief at your marginal rates via your UK tax return). For business owners, pension contributions are a tax efficient method of withdrawing profits from the business and reducing UK corporation tax.
In addition, a UK pension will grow free of UK taxation (income and gains) until the point you choose to draw benefits from the scheme. Whilst you should check your individual position with your tax adviser, in most circumstances your UK pension will also be able to grow free of US taxation again, until the point of drawing any benefit. Furthermore, from a UK inheritance tax (“IHT”) perspective, a UK pension is outside of your estate for IHT purposes.
The annual allowance for pension contributions that can benefit from UK tax relief is currently £40,000 gross per annum. However, if your income rises above £200,000 this allowance can be ‘tapered’ down to a minimum of £4,000 gross.
It is also possible to carry forward any unused annual pension allowances from the last three tax years (i.e. going back to 2019/20 tax year).
The calculation used for tapered annual allowance and carry forward is subject to complex rules. Therefore, if you believe you are in a position to make additional pension contributions, you should seek professional guidance.
For UK tax residents who do not have relevant UK earning, the maximum allowance is £3,600 gross (£2,880 net of basic rate tax relief).
One way to utilise Excess Foreign Tax Credits and benefit from UK Income tax relief is to invest into a qualifying EIS. This will also not incur a US tax charge.
In addition, individuals may be able to bring non-UK taxed offshore funds to the UK to invest in certain qualifying companies, such as EIS. Through the use of Business Investment Relief (“BIR”), these individuals may be able to do so without incurring UK tax charges.
EISs are intended to encourage private investment into small businesses that need to raise capital in order to grow. They do so by offering a range of tax reliefs and benefits to the investor. An EIS is not a listed investment and it is possible for an investment into a single small company made by an individual to qualify as an EIS. In general, most individuals will employ a specialist EIS manager to select a handful of companies for investment.
The standard EIS allowance remains at £1 million and a further £1 million over the standard allowance can be invested into "knowledge intensive companies", giving investors a total allowance of £2 million per UK tax year.
An EIS may benefit from a 30% Income Tax relief on contributions and is limited to the total UK Income Tax liability of the individual. It is also possible to carry back all or part of the UK income tax relief to the preceding UK tax year as long as the relief total is not exceeded.
It is also possible to use EIS investments to defer capital gains tax (“CGT”) liabilities for an unlimited amount of time. The investment must be within one year before or three years after the date of disposal, and the full gain must be reinvested for full CGT deferral. EIS’s grow free from CGT, but dividends are treated as taxable income.
Care needs to be taken when US connected individuals consider investing in EIS opportunities as not all investments will be suitable from a US tax perspective. In addition, given the high risk and illiquid nature of these type of investments they will only be suitable for sophisticated investors and professional advice should be taken before investing.
The end of the tax year provides significant opportunities to utilise available tax allowances and plan for the tax year ahead. Not only can these steps improve your tax position now, but also in the years to come.
If you wish to discuss any of the points raised above in more detail, please do not hesitate to contact your investment manager or wealth planner, who will be able to assist with any questions you may have.
This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Wealth Management UK LLP and/or its affiliates gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Wealth Management UK LLP, employees and associated companies for any direct or consequential loss arising from this document.
LGT Wealth Management UK LLP, LGT Wealth Management Jersey Limited and LGT Wealth Management US Limited are affiliated financial services companies (each individually an “Affiliate). LGT Wealth Management UK LLP is authorised and regulated by the Financial Conduct Authority in the United Kingdom. LGT Wealth Management Jersey Limited is incorporated in Jersey and is regulated by the Jersey Financial Services Commission. LGT Wealth Management US Limited is Authorised and Regulated by the Financial Conduct Authority in the United Kingdom, and is a Registered Investment Adviser with the Securities & Exchange Commission in the United States.