PERSONAL TAX PLANNING

I. Working at the margin

Scenarios in your exam will often involve looking at how a course of action might change
an individual’s taxable income and require you to consider how this changes their tax position.
It is much quicker in this type of question to ‘work at the margin’. This means that rather
than preparing two full income tax computations for the individual before and after the change,
we simply look at the change in the individual’s income and calculate the difference
to their tax bill.

In order to determine the individual’s marginal tax rate, and hence the rate at which their tax
liability will change, we must consider:

• Their existing taxable income to identify whether the individual is currently a basic, higher
or additional-rate taxpayer

• The change in the individual’s taxable income and how this will change their income tax
due.

(i) Is the new income simply taxed at the same marginal rate of tax or does it mean the
individual’s taxable income is pushed into a higher rate tax band?
(ii) Could the new income utilise previously unused savings or dividend nil rate bands?
(iii) Could the new income mean that the personal allowance becomes abated?

The idea of working at the margin and preparing one marginal computation rather than two
full income tax computations can often be a vital time saver in the exam and is a really
important concept which you will see time and time again.

If the change in income is in employment income or trade profits don’t forget that this will
also change the national insurance contributions due.

In the following sections you will see Activities which incorporate the idea of working at the
margin.
II. Married couples and civil partners – tax planning
and working at the margin

It is very common for us to see married couples/civil partnerships (CPs) in exam

questions. We know that each person is taxed as a separate individual entitled to their own
personal allowance and savings and dividend nil rate bands. A question may ask us to
consider how income generating assets (such as shares or rental properties)
should be divided between a couple in order to generate the lowest combined
tax bill.

In order to minimise a couple’s overall tax liability we shall need to consider:

• Each individual’s level of taxable income to determine their marginal rate of tax

• The type of income we are considering. For example, if an individual already fully utilises
their savings nil rate band then this will make a difference to the additional tax if they are to
receive more savings income

• Whether one member of the couple is not using their personal allowance whilst the other
member is a basic rate tax payer. At this point we can consider the transferable personal
allowance.

Consideration of which partner should own any income-generating assets can be

useful in minimising combined tax liabilities.

For example, shares can be transferred between partners to provide each one with different
levels of dividend income. This can be used to ensure both partners utilise their dividend nil
rate band, and any extra dividends are taxed at the lowest marginal rate.

For other assets, such as rental properties, there is an automatic assumption that the
property income is split 50:50 between the couple. However, an election can be made
specifying the actual proportion to which each is entitled. Again, this can be used to ensure
the rental income is taxed on the partner with the lower marginal rate.

Any transfer of assets between spouses/CPs will be at nil gain nil loss for capital gains
purposes and exempt for IHT. (These aspects are considered later in the Workbook in the
Capital taxes chapters).
Activity 1: Minimising a married couple’s tax due

Petri and Jane are a married couple with the following income during 2020/21:

Petri recently inherited £300,000 following the death of his father. He plans to invest
£200,000 of this in UK shares earning a 4% yield per annum and the remaining £100,000
will be left on a cash deposit earning a 1% yield per annum.

A friend has suggested that Petri should alter his plans to reduce his family’s income tax
liability. He says Petri should gift Jane £150,000 of his inheritance and that they should
each then invest two-thirds of their funds in shares with the remaining third being left on
cash deposit.

Required

Calculate the income tax savings which could be achieved in a complete tax year if Petri was
to follow his friend’s advice and give £150,000 to Jane. In order to do this efficiently, you
should just calculate the additional tax payable by Petri and Jane on the income generated
by the inherited funds, rather than preparing complete income tax computations.

III. Net spendable income

Another frequently examined topic is the calculation of net spendable income available
to an individual. This is often a calculation for the net spendable income after a
proposed course of action or comparing two alternative courses of action.

The basic approach to follow will be to prepare a table listing the individual’s ‘cash in’
and ‘cash out’ based on the facts in the question. A sample pro-forma is given below.
Clearly, one of the important ‘cash out’ items will be any tax due from the individual – this
will normally be income tax but it could also include national insurance. Usually it is easier
to prepare a separate working to calculate the tax due and reference it back into
this summary table. Keeping the tax calculation separate to the main spendable income
calculation means you are less likely to confuse which items are cashflows and
which are not. For example, a company car benefit calculation will be required to work out
the income tax due for the individual but the value of the car benefit is not an actual
cashflow!
An example pro-forma for a net spendable income calculation is given below and the Activity
in the next section will allow you to see a calculation.

In a variation on this type of requirement you may be told that an individual does not have
enough income to carry out a specific course of action. You will then be asked to calculate the
additional cash that would be required by the individual to do this. Your approach should be
to calculate net spendable income using the proforma above, including the individual’s
planned expenditure, which will result in a negative figure. This shortfall represents the
additional cash that the individual would require to pursue their plans.

IV. Comparison of two different employment packages

You may be required to advise an employee who has been offered two different
employment packages as to which package will give the individual the highest net
spendable income or the least overall tax cost. You will need to bring together your
technical tax knowledge in terms of how the packages will be taxed and also the skill of
producing comparative net spendable income/total tax cost calculations.

The following Activity illustrates how this could be tested.

Activity 2: Net spendable income of two employment packages

Arthur is employed by Garner Ltd currently earning a salary of £45,000 per annum. He has
been offered sole use of a company car or, alternatively, a loan to enable him to purchase the
same motor car himself. Under either option, Arthur will pay all fuel costs of the car himself
which will amount to £60 per month.

Company car (Alternative 1)

• Garner Ltd would purchase the motor car on 1 October 2020 for £9,800, which is £500
less than the list price.

• The motor car would then immediately be made available to Arthur for his exclusive
private use. The motor car will have CO2

• emissions of 108g/km and is petrol powered.

• Arthur will contribute £50 per month towards the private use of the motor car.

• Garner Ltd would give the motor car to Arthur after three years, when its market value is
expected to be £4,000.

Loan (Alternative 2)

• Garner Ltd would provide Arthur with an interest free loan of £9,800 on 1 October 2019.

• The loan would be written off in three years’ time.

Required

Prepare calculations of Arthur’s net spendable income for 2020/21 under either option.

V. Sources of personal finance and tax

5.1 Raising finance

Questions may present a scenario where we are advising an individual on how to raise
finance. One way we could do this would be to sell off a capital asset (such as a rental
property or shares) to realise cash. On sale of a capital asset capital gains tax must be paid
and will reduce the aftertax cash realised for the individual. This is covered in more detail in
Chapter 13 on Capital tax planning.

Rather than selling assets, we could also advise our individual to borrow via a bank
overdraft, unsecured bank loan, mortgage, credit card or hire purchase
facilities. All these methods will raise funds but will also generate interest payments.

Tax relief on these types of borrowings will be limited and is generally only
available if the loan is a qualifying loan as covered in Chapter 2 on Income tax
computation, for example a loan to invest in a close company or partnership. (Although note
that interest relief is not available on a loan to buy shares in a close company if EIS relief is
claimed for the investment). There is also relief available if the loan is used to purchase
a rental property as covered in Chapter 5 on property income.

5.2 Investing surplus finances

Another exam scenario might be advising a high net worth individual with surplus funds
looking to invest them in a tax-efficient manner.

These could include consideration of:

In this type of question you may be required to explain and apply the tax reliefs available on
an enterprise investment scheme (EIS)/ seed enterprise investment scheme (SEIS) or
venture capital trusts (VCTs) investments or contributions into a pension scheme.
Remember to always be very specific to the scenario.

You may also be required to:

 • Advise a client about a planned sale of an EIS/SEIS or VCT investment, how the sale of the
shares would be treated for tax purposes and whether the sale would trigger a claw-back of
any income tax relief previously claimed (see the Activity below.)

• Compare and contrast the tax liability of an individual when they are investing in EIS/SEIS
or VCT shares. You may be asked to consider two possible investments for their cash and
need to understand the differing tax consequences.

To be able to answer these types of questions you will need a strong knowledge of the
rules on tax-efficient investments as covered in Chapter 3. Your presentation will also be
important. The examining team often state that students’ answers can be poorly laid out,
meaning that it is difficult to understand exactly which situation is being explained. This
makes it very hard to award marks. The use of clear headings and sub-headings will
make it easier for the marker to understand which type of scheme you are discussing in your
answer. You could also consider a tabular summary to compare and contrast the schemes.

Activity 3: Sale of EIS shares on two different dates

Sophie expects to have taxable income in 2020/21 of £75,000 and wishes to sell her ordinary
shares in Swinscoe Ltd. She subscribed for 12,000 shares in Swinscoe Ltd for £20,000 on 1
January 2018. On subscription she obtained an EIS tax reducer of £6,000.

She intends to sell all her shares for £10,000 (an arm’s length price) on 1 August 2021 and
will relieve her loss arising on the shares in the most tax efficient manner.

Each year Sophie realises gains on other disposals in excess of the annual exempt amount.

Required

Explain, with supporting calculations, the tax implications of selling the Swinscoe Ltd shares
on 1 August 2021. Explain any advantages and disadvantages for Sophie of delaying the sale.

With regards to pension questions, scenarios might include:

• Advising a client of the maximum pension contribution which they could make
without triggering an annual allowance charge

• Calculating a client’s income after tax and pension contributions (perhaps after
making a large pension contribution triggering an annual allowance charge)

• Some written advice about pensions and tax planning (see the following Activity).
Activity 4: Reduction in annual allowance

In a recent meeting with a new client, Olive, you discover the following.

Olive has regularly contributed £40,000 (gross) into her personal pension scheme in order to
fully use her annual allowance. She is an additional-rate taxpayer for 2020/21 and a recent
promotion means that her income levels have risen so as to reduce her annual allowance for
2020/21. This means that she has incurred an annual allowance charge.

Olive’s adjusted income (for the purposes of calculating her annual allowance) was £180,000 in
2019/20 and in the previous two years it had been £110,000.

Olive makes regular capital gains in excess of her annual exempt amount each year.

Until now Olive has been investing the maximum amount each year in an individual savings
account (ISA). She is now questioning whether there is any point in investing in either a cash or
stocks and shares ISA as savings and dividend income are now exempt from tax up to £2,000
per tax year.

Required

Write an email to Olive which explains the reduction in her annual allowance and discusses her
thoughts about ISAs.

VI. Investing in property

In other questions you may be asked to give advice about starting to rent out a property. This
could be a straightforward explanation and application of the property income rules
or it could be helping someone to decide whether or not to let their property out as a
furnished holiday let (FHL). You could be asked to explain the conditions to be met
for the property to qualify as a FHL and the advantages of the property being a FHL.
This type of question would use the knowledge covered in Property income. You could also get a
more complicated numerical style question looking at a calculation of the tax saved by
qualifying as a FHL.

In this type of question you would need to:

• Compare the different incomes dependent on whether or not the property is treated as a
FHL, and then

• Calculate the marginal tax on the different property incomes, and finally

• Calculate the difference in the tax due.

As we have seen above, working at the margin here rather than preparing full income tax
computations would be a great time saver.
Activity 5: FHL

Quentin, a higher-rate taxpayer, currently rents out a property in South West England and
anticipates the following income and expenditure during 2020/21:

Quentin also spends £1,000 per year on replacement furniture.

Quentin is currently renting the property out as a long-term rental but is considering changing
his arrangements such that the property will qualify as a furnished holiday let in 2020/21.

Required

Calculate the tax Quentin will save in 2020/21 if the property meets the FHL definition rather
than a long-term rental. Note that you should assume 2019/20 rates and allowances continue to
apply.

VII. Share schemes

Share schemes could be tested in a sub-requirement of one of your questions. These types of
requirements could take several forms:

• Recommending the most suitable form of tax-advantaged share scheme based on the
requirements of the company in the question.

• Comparing and contrasting two (or more) tax advantaged schemes in relation to
their conditions for approval and/ or their income tax and capital gains tax consequences.

• An explanation (possibly with supporting calculations) of the tax advantages of a

particular tax-advantaged share scheme relative to a non tax-advantaged share
scheme.

• You could be asked to calculate the net increase in wealth of an individual of selling
shares acquired through a share option scheme. An explanation as to how to handle this
type of requirement is given within Skills checkpoint 2 of this Workbook.

You will need to have a thorough knowledge of the conditions relating to each type of
advantaged share scheme as set out in Employment income. Another key skill will be your
ability to apply the knowledge to the specifics of the scenario in answering the question. You
should not be reproducing large quantities of knowledge without attempting to apply them to
the scenario.