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Tax Year End Planning

Tax Year End Planning

Tax efficiency and tax planning of a client’s portfolio are often examined in the R06 and AF5 exams and of course, the concepts can be tested across many of the other exams too. So, in this article, we look at some of the tax year end planning considerations.

Yes, it’s nearly upon us – all the last minute planning for the end of the tax year and all those new tax rates to consider. The good news is, for those of you taking the CII exams, you have another 5 months to get your head around the rate changes as these will not be examined until the new examinable tax year starting on 1st September 2022.

Utilising IHT Exemptions

Where clients in R06 or AF5 have a potential IHT liability, stating the use of exemptions can often pick up an easy couple of marks.

Whilst most gifts and some trusts are potentially exempt transfers that can take 7 years to be fully outside of the estate for IHT purposes, there are some exceptions.

Annual exemption – A client can gift up to £3,000 per tax year, which is considered outside of the estate immediately. This can also be backdated one year. Hence, if a client hasn’t used the gifting allowance this year or last, that’s up to £6,000 which could be given away. This could potentially save IHT of up to £2,400 (or £4,800 for a couple).

Another allowance that can be used is the £250 small gift allowance. Under this exemption, a client can gift as many gifts of up to £250 as they wish as long as they have not used another allowance on the same person. These gifts will again be considered immediately outside of the estate for IHT purposes. 

Single Premium into a Pension Plan 

Personal pension contributions can be a very tax-efficient way to save especially if your client is a higher or additional rate taxpayer and even more tax-efficient if they are subject to the personal allowance trap.

Let’s look at an example of an additional rate taxpayer, who expects to be a basic ratepayer in retirement. If they were to pay a single contribution of £20,000 gross, then instead of paying income tax of £9,000, they can access £5,000 tax-free and pay 20% on the other £15,000 – so a tax liability of £3,000 and a saving of £6,000.

This article looks at some of the tax year end planning considerations. Click To Tweet


Using your Defined Contribution Pension to Bridge Income

Let’s now consider a client who has taken early retirement and has no earned income. They have a defined contribution fund and will be entitled to a State Pension and a pension from a company defined benefit pension a few years down the road. They are currently living off their non-pension savings.

It is likely that when their State Pension and their Defined benefit scheme commence, the client’s personal allowance will be used each year. Until then, they could take income from their defined contribution scheme. This would give the client the opportunity to get funds out of the pension free of income tax up to the personal allowance. This may prove a very tax-efficient way to take income, particularly if there is no current IHT liability as, of course, Pensions are an IHT tax wrapper, so this does need to be considered in this type of planning.

Crystallising Gains for CGT Planning 

Recommending ways to make a client’s investment portfolio more tax-efficient often crops up in R06 and AF5. Here, we look at Bed & ISA and fund switching which are basic tax planning measures and can often pick up a few quick marks in either of these exams if the clients have a CGT tax liability from an unwrapped investment.

Within a Unit Trust or OEIC, a fund switch is considered a disposal for CGT purposes provided that the same investment is not repurchased within 30 days. Therefore, if a client were to switch to another similar fund and switch back after the 30 days, then you can reduce their CGT liability accordingly.

Let’s consider a client who has a Unit Trust they purchased at £100,000, which is now worth £200,000. By selling £24,600 worth of their fund holding, the client would realise a gain of the CGT annual exempt amount of £12,300. The client can then use the proceeds to purchase another similar fund – after 30 days they sell the second fund and repurchase the first. The client in this situation is maximising the annual exempt amount and will not incur a CGT liability assuming the second fund has not increased in value or the sale takes place in the new tax year.

You can also use your annual exempt amount by selling an investment and repurchasing it within an ISA otherwise known as Bed and ISA.

Income from an investment fund is generally taxable but where that fund is held within an ISA, tax does not apply. In addition, investments held within the ISA wrapper are free of UK tax within the fund. With a £20,000 per annum allowance, if a client has unwrapped funds, then moving funds to an ISA wrapper is an obvious way to shelter the investment from tax.

If you are studying for the forthcoming R06 and AF5 exams, understanding these tax planning measures could give you some quick wins!

Grab the resources you need!

We consider our R06 case study analysis a must-have resource for this exam. Our team have over 10 years’ experience working on the case studies for each exam sitting and we continue to accurately predict the majority of questions that are asked.

We consider the types of questions (and answers) we think will be tested based on the case studies plus providing generic R06 questions and answers as well as help on exam technique. The analysis now also includes self-test questions so you can practise exam technique and test your technical knowledge relevant to the case study subject matter.

You will also have an opportunity to ask questions of our lead analysis author on our email support day which is available one working day before the exam. Full details of our analysis are available here, or you can download the taster analysis to see for yourself what is included.

Click here to download our free taster analysis for CII R06