Effective tax planning isn’t a lone sport. By looking at household income in the round, we can plan to make optimal use of all allowances available is likely to create the most tax-efficient solutions.
The income of each spouse is taxed separately, with each party being entitled to a personal allowance. Capital gains are also taxed separately, each party having their own annual exemption (see below).
Where you each have a different tax band, a key part of planning is getting the right distribution of income between you. This can ensure that the personal allowance of the lower income spouse is not wasted, and give access to lower tax bands. Transferring income-producing assets, such as property, stocks and shares, or even bank accounts, can be an efficient way to do so. Anti-avoidance legislation exists in this area, and we recommend taking advice prior to any action, to ensure that any arrangements are compliant. It is important, for example, that the transfer is an outright gift, with the donor no longer exerting control over it, or deriving a benefit from it.
An optimal allocation of income between spouses can only become more important in the future, especially with the fall to the additional rate threshold for income tax.
Where either you or your partner get Child Benefit, and have adjusted net income more than £50,000, the HICBC applies. Note that for the HICBC, ‘partner’ doesn’t just mean spouse or civil partner, but includes someone you live with as if you were married.
The HICBC claws back Child Benefit at a rate of 1% for every £100 of income between £50,000 and £60,000. By the time income is £60,000, all Child Benefit payment is effectively lost. You can disclaim payment in these circumstances, to avoid having to pay the charge: but it is usually recommended that the actual claim itself is continued, in order to maintain eligibility for the State Pension.
If both you and your partner are over the income threshold, HICBC is the responsibility of whoever has the higher income. Where income reaches £50,000, the taxpayer has an obligation to notify HMRC of their liability to the charge. HMRC may make the initial contact, but this should not be relied upon so it’s important that if this is something you or your partner receives, you don’t claim what you’re no longer entitled to. HMRC will want it back for sure.
Think tactically where there is discretion over how income is distributed between you and your spouse. £100,000 split equally between you and your spouse, for example, keeps you out of HICBC: if it is all taxable on one spouse, the benefit of Child Benefit payment is lost. We can help you review ways to reduce or redistribute taxable income in your circumstances.
Children are treated independently for tax purposes. They have their own personal allowance, annual capital gains tax exemption and their own basic rate tax band and savings band. From a tax perspective, it is usually more efficient for grandparents – rather than parents – to provide funds for investment for under-age children.
When it comes to funding children through university, parental input is increasingly common, and the purchase of housing is something often considered. It is important that any such arrangement is structured correctly. Key questions are who owns and buys the property – whether it is the parents, or the parents and child together, or whether the child is provided with funds to make the purchase. The tax and legal implications need to be thought through, alongside your personal and family preferences.
Gifts & Planning for the Big Kids too!
And of course, thinking about tax and your children isn’t just about the young ones. Family tax planning for adult children is important too and the key is to make sure that you don’t leave it too late. Remember that gifts given more than seven years before you die do not have tax on them (unless that gift is part of a trust) and you are allowed to give gifts of up to £3,000 per year, tax free without them being in your estate, either in part or as a sum of numerous gifts. Unused allowances can be carried forward one year, so if you didn’t use last years, you can gift up to £6,000. A couple could therefore gift £12,000 to their children (or others).
There is also the small gift allowance where you can gift up to £250 as many times as you like during the year. See here for more details.
HMRC are so big hearted, they also allow you to give gifts in the event of a wedding or civil partnership. Up to £5,000 for a child, £2,500 to a grandchild or great-grandchild and £1,000 to any other person.
Gifts aren’t just money. They also include houses, land and buildings, jewellery, listed stocks and shares and unlisted shares in companies in which you’ve had a holding in the two years before your death.
If you’ve got a spare room and are considering letting it out, you can earn £7,500 in rent, free of tax.
Additionally, children living in a property at university which they own outright, and letting out furnished accommodation in the property, may be able to benefit here. Provided the relevant conditions are met, the scheme could also allow them to earn up to £7,500 in rent, free of tax. When added to the personal allowance, this provides scope for £20,070 in tax-free income for them.
Contact your client manager if you’d like to discuss any of the above tax planning opportunities or indeed last weeks area for tax planning if you are a Director or Shareholder of a Limited Company.