Year end tax planning considerations
It is a common misconception that tax planning opportunities are only available in high-income years or when big transactions occur, such as selling property, or selling a large amount of stock etc. However, just as tax planning is essential in those situations, it is also an important consideration during a difficult period. Not only will this help minimise tax liabilities, but it can also provide an opportunity to review your overall plans for the future.
Profits in farming commonly shift and the volatility can result in irregular tax payments. Given the year we have had, profits are likely to be unusual, some businesses may be struggling, while others have adapted or taken advantage of new opportunities and may find their profits spiking. Timing of year end transactions should be considered if you think you have been particularly profitable in the year. Bringing forward planned expenditure before the year end or slightly delaying sales could be advantageous. If your business has been loss making there may be an opportunity to offset those losses against other income streams to reduce the overall tax payable.
For those who trade as a sole trade or in partnership, farmers averaging is available, which smooths profits over either two or five years, whichever is more advantageous. Farmers Averaging makes use of any available personal allowance (currently £12,500 per person) and can bring income into the lower tax bands where these have not been utilised, to tax income at the basic rate (20% for trading profits and 7.5% for dividends). This can mean a larger proportion of income can be taxed at a lower rate than before, resulting in a tax saving in the year or getting a refund of some of the tax paid last year. Farming businesses who trade through companies do not have the same option as their profits are taxed at a flat rate, which is currently 19%.
The annual investment allowance that gives an upfront tax deduction on the cost of plant and machinery remains at £1 million for the forthcoming year. Where Hire Purchase is used the items must be on farm and in use at the year end to be able to claim the relief.
Where cash is available, making pension contributions can be a good tool for tax relief, while also making provision for the future. When used to their full potential, pensions can enable you to be less dependent on the farm income aiding succession planning. The tax relief for an individual is achieved by extending the basic rate band by the gross amount of contribution paid. This means more of your income is taxed at the lower rates. Companies can make pension contributions on behalf of their directors and employees, with relief being achieved by a tax-deductible expense recognised in the trading accounts.
Pension contributions need to be considered carefully as there are limits to the tax efficient contributions you can make. The annual allowance is currently £40,000, and if you have not fully utilised your annual allowance in previous three years, this can be carried forward to allow you to have tax relief on up to £160,000. Pensions also have a lifetime allowance of £1.073 million and where the fund value exceeds this level there can be additional charges to tax when the funds are withdrawn.
Directors can choose when they declare dividends and extract wealth from their companies, and therefore partly control the timing of the associated charge to income tax. With a year of volatile profits, it is particularly important to look at income received outside of the company to optimise the level of dividends distributed.
Similar to dividends, if you have a family trust it may be sensible to consider the level of income distributions made to the beneficiaries before the end of the tax year, to maximise the utilisation of the tax rates and allowances of the beneficiaries.
Not only is it important to plan your income, but there are also reliefs available for Capital Gains Tax. Each year there is an annual exempt amount, which is currently £12,300. Gains on disposal of capital items up to that amount can be made free of tax.
Some of you may hold investments in the form of shares. As a result of Covid-19, stock markets have moved dramatically and many of these shares will have a lower value. It may be worth considering selling these shares to crystalise the loss if you know you have planned future sales which may create a capital gain. Where your investments have increased in value, now may be a good time to cash these in to make use of your available annual exempt amount and the current low rates of tax. Investment decisions should not be tax driven and it would of course be sensible to take professional financial advice before reaching a conclusion.
If you are thinking of disposing of residential property, whether this be on the open market or via gifts to family members, it is crucial to remember that chargeable gains over the annual exempt amount need to be reported to HMRC and the tax paid within 30 days of the transaction completing. It is important we have enough time to prepare the calculations within the 30-day window, so please do get in touch if this is within your plans to avoid any penalties.
To summarise, following an unusual year it would be worthwhile reviewing the opportunities available to optimise your tax position. It is always sensible to think through the long-term implications of any Income and Capital Tax planning that is undertaken, to ensure that it compliments, rather than detracts from, the family's longer-term objectives.
If you would like to discuss the above, or any other pre-year end tax planning points, please do not hesitate to contact us.
Rosie Bennett ACCA
Rosie joined Evolution ABS in 2012 and became ACCA qualified in July 2017. Rosie is now continuing her studies by sitting her Chartered Tax Exams.
When Rosie isn’t studying or working, she is very active within Young Farmers and is currently Devon Federation of Young Farmers Vice County Chairman - in August 2020 Rosie came runner up in the National Federation of Young Farmers Senior Member of the Year!
She also enjoys showing Holstein Dairy Cattle, helping her parents on their dairy farm and cycling.