Common tax planning questions

Q. For IHT planning purposes, does the tax year end have any relevance?

A. 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 may also be explored. 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.

Q. My client has realised a bond gain - are there any tax year end planning opportunities?

A. 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.

Our tax relief modeller can do these calculations for you.

Q. My client has an uncrystallised capital gain - are there any tax year end planning opportunities?

A. You can use the Capital Gains Tax (GGT) Annual Exempt Amount (AEA) to manage the gains that a client will face year on year. Be careful when reinvesting the money to avoid “bed and breakfasting” (as detailed below). However, there is an annual AEA of £3,000 for 2025/26 that can be used to mitigate the cost of CGT. This amount can be used for any asset subject to CGT and clients pay no CGT on any gain within the AEA.

Clients can use their AEA in the way that's most beneficial for them. In 2024/25 there may have been pre 30 October gains and post 29 October gains. Clients can decide which gains to use the AEA against as well as which gains fall into any available basic rate band first.

Consider Colin who is a higher rate taxpayer. He triggers a pre 30 October 2024 gain of £9,000. After deducting AEA of £3,000 he has £6,000 of pre budget chargeable gains at 20%.

Now consider Carol, also a higher rate taxpayer. She triggers a pre budget gain of £6,000 and £3,000 post budget. She applies her AEA to the £3,000 post budget gain. Carol therefore only has £6,000 pre budget gains taxed at 20%.

In summary, Colin and Carol have the same CGT liability despite Carol triggering £3,000 of gain under the higher post budget rates. 

The treatment of losses depends on whether they are:

• losses of the same year of assessment as the gains
  
  
• losses of earlier years of assessment.

The procedure is as follows:

1. Deduct any allowable losses accruing in the year of assessment from gains made in that same year – even if the net chargeable gains fall below the AEA (losses which cannot be set against gains of the same year of assessment are carried forward and set against gains which arise in the future).

2. If the net gains under 1. above are more than the AEA and there are unused losses brought forward from a previous tax year then deduct those losses, but just enough to reduce the net gains to the AEA limit.

3. If there are still unused losses from a previous year after they have reduced gains to the AEA, they can be carried forward to future years.

Q. What is meant by the term bed & breakfasting in the context of tax planning?

A. 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. 

Q. Are there situations when the 'bed & breakfasting' anti avoidance rules do not apply?

A. 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

Q. My client's adjusted income will exceed £260k, do I still need to calculate their threshold income?

A. 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 £260,000, as both limits must be exceeded for the tapered annual allowance to come into effect. 

Q. When is an individual pension contribution eligible for tax relief?

A. 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.

Q. 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?

A. 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.

Q. When is an employer pension contribution eligible for tax relief?

A. 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.