Benefits and Tips for Effective Individual Tax Planning

 Inheritance tax, income tax, capital gains tax, investment taxes, and more—there are a lot to think about as a taxpayer in the UK, most especially for expatriates or emigrants where their tax advantages way back in their home country are stripped in their new country of residence.  

Proper tax planning, along with income tax advice, lets you get the most out of your investment and income, typically resulting in reduced tax bills. In this article, we lay out the advantages of tax planning and how you can be strategic about it: 

Tax Planning Significantly Trims Your Tax Bill 

Strategic tax planning can greatly help you reduce your overall tax bill as you identify and utilise tax-efficient ways to hold your capital, assets, savings, and pensions. More so if you are an expatriate, as certain assets that were tax-efficient in the UK may become taxable in your country of residence. 

Expatriates can benefit from reviewing their arrangements when they become non-residents. This includes reducing liability for income tax, capital gains tax, and any other taxes that may be applicable in your country of residence.  

Failing to review your tax arrangements, you may unknowingly end up paying more taxes than necessary, such as income tax on bank interest you are not withdrawing or capital gains tax when you switch between investments. Alternative structures, such as currency flexibility, may also provide a legitimate way to reduce tax liability and offer other benefits. 

Tax Planning Helps Reduce Inheritance Tax 

By paying less tax in your lifetime, you might pass more inheritance tax responsibilities to them. However, there are ways around it to reduce their future liabilities when you plan early on. Take, for example, some investment structures, such as locally-compliant life assurance bonds, which will take care of the heirs’ tax responsibilities once the owner of the estate dies. 

Tax planning does not only limit your heirs’ IHT liabilities but also ensures you get a tax-efficient income and investment growth throughout your lifetime. IHT experts can help you explore the options that will work best according to your circumstance. 

Estate Planning Ensures Your Heirs’ Future 

Should you be out of the picture, tax planning can greatly simplify your family’s responsibilities. Tax-efficient investment arrangements give you the opportunity for better control and flexibility. For instance, UK pensions are typically only transferable to a spouse upon death. 

However, transferring them to a Qualifying Recognised Overseas Pension Scheme (QROPS) or reinvesting them in a suitable tax-efficient structure in the country you are residing in can allow you to pass funds on to other chosen beneficiaries, often without the need for probate.  

Tax Planning Helps You Outdo Daily Living Costs 

Maximise real returns and outdo the cost of living through proper tax planning. The actual real returns, after considering all taxes, expenses, and inflation, are the most important factor when assessing the value of investments. For example, property investments may have relatively high returns in the long term, but taxes such as stamp duty, local rates, capital gains, and potentially wealth taxes can significantly reduce them. 

It is important to have a well-diversified portfolio that is specifically designed to meet your needs, goals, time horizon, and risk tolerance. Without proper tax planning, returns can be diminished by taxes that could have been avoided or at least reduced, making tax planning an important aspect of maximising real returns. 

Quick Tax Planning Tips for Reducing Tax Liabilities 

If you and your family are looking for ways to maximise your returns whilst reducing your tax responsibilities, with the help of tax experts, you can have a wide range of options, although it may not be as complicated as you think doing it yourself when you do your research. Take a quick look at these options depending on your circumstance: 

• Marriage Allowance 

If you are a basic rate taxpayer, you can transfer up to £1,260, or 10% of your personal allowance to your spouse or civil partner if the latter has an income below the personal allowance. This can result in a reduction of up to £252 in your tax liability for the current year. 

• Employees Reliefs 

As an employee, there are several tax reliefs that can be claimed related to your employment, such as allowances for professional subscriptions, expenses incurred while working from home, and business miles travelled using your personal vehicle. 

• Trading and Property Allowances 

These allowances aim to exempt modest amounts of income from sources such as sales on eBay and Amazon, and rentals from Airbnb. Each allowance has a tax-free limit of £1,000. Additionally, you can always claim “rent-a-room relief” if part of your home is rented out, giving you a tax-free receipt of up to £7,500. 

• Gift Aid Payments 

If you have the highest marginal tax rate in your household, consider making gift aid payments. It’s an easy process—you just tick the box in your tax return of charity gift payment, informing the charity that you are a legible resident in the UK and you have adequate taxable income to make the payment. 

Since it is recorded as payment on your tax return, you will then get basic rate relief which the charity will claim for you. This is very tax advantageous for you when you pay a higher tax rate, as your charity contributions will pave the way for you to obtain additional tax relief. 

• Savings and Dividend Allowances 

Be aware of the allowances and reliefs you can claim for your savings and dividends income as well. For savings, if you are a basic rate taxpayer, your allowance is at £1,000 and higher rate is at £500. Additional rate taxpayers generally have no savings allowance. For dividend income, your allowance as a basic rate taxpayer is £2,000, the same as a higher and additional rate.  

• Capital Gains Tax Annual Exemption 

This may not be applicable to you when your income and capital gains exceed £2,000 and are taxed on a remittance basis. Other than that, you can take advantage of the annual capital gains tax exemption of £12,300 before 6 April 2023 by crystallising capital gains. One way to do this is to sell stocks and shares and buy them again, which can definitely increase the base cost of your assets for future sales. 

There are many other ways to significantly trim your tax liabilities, regardless of what tax you are liable to. Tax experts in the UK, such as Legend Financial, are here to help you explore your choices. 

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Swati

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