Family tax planning is a smart way to utilise all of the exemptions and allowances legally afforded to you.
In the UK, every individual has a personal tax-free allowance and is taxed independently. This applies to working parents, retired grandparents and also children. Because of this tax structure, it is possible to use legitimate means to reduce the joint size of your family’s tax bill.
Strategic (but non-aggressive) family tax planning can benefit contractors, small business owners, and even working adults. If you plan to undertake some form of family tax planning, however small it may be, we advise you to speak with a qualified and independent accountant first, whether it is our team at Tax Agility or an equally experienced professional. To give you an idea about family tax planning, we aim to discuss family tax planning in detail and highlight essential areas in this article.
What is family tax planning?
Family tax planning is a tax strategy, which maximises the usage of the many tax exemptions and tax allowances that exist within the legal framework for members of a family household. Often this happens through the careful shifting of income from the hands of the primary wage earner to their spouse or children.
The rationale that dictates this strategy is that anyone who does not earn as much as the primary earner of a household will be taxed at a lower tax band. Therefore, the maximum amount of taxable income that can be legally transferred to another family member should be utilised to minimise taxes and maximise household income.
Every person in a household is entitled to an annual personal allowance (or PA) on any income. A personal allowance is a threshold above which income tax is levied on an individual’s income. The personal allowance for tax year 2019/20 is £12,500 for individuals earning less than £100,000 a year. Once the £12,500 threshold is hit during the tax year, that person has to start paying taxes on any income they earn that is above that amount.
For example, if you earn £10,000 in the 2019/20 tax year, you do not have to pay any tax for that year. But if you earn £200,000 in the same year, you will lose your personal allowance and pay a higher tax rate on the vast majority of your income.
Examples of family tax planning strategies
Finding ways to spread income across various members of a household is the key to minimising the amount of tax which your family will pay in a year, and maximising how much income is tax-free or paid to a lower tax band. This can be done in a variety of ways – however, these strategies must be approached with proper regard for rules and regulations.
Make your family members shareholders
A highly popular approach among company directors when it comes to lowering tax bills is to make your spouse or a family member a shareholder in your company. This arrangement allows them to receive dividend payments instead of salary; and because dividend is taxed on a lower rate than salary, the overall tax bill is reduced accordingly.
Putting your family members on payroll
If your business has a legitimate need, like you need a weekend driver to take care of deliveries and your son is free, you can employ him and pay him commercially viable wages. The payment to your son is a tax-deductible expense in your company accounts. Follow the link to the article “Does HMRC object to putting family members on the payroll” if you would like to know more.
One legitimate strategy is to make use of marriage allowance, which allows an individual who earns less than £12,500 a year to transfer £1,250 of their personal allowance to their spouse or partner. By doing just that, you can immediately reduce your tax bill up to £250. To qualify:
- You must be married or in a civil partnership
- The lesser earner receives an income which is below the personal allowance threshold, i.e. £12,500
- The spouse or partner earns between £12,501 and £50,000 and pays income tax at the basic rate
In theory, you can give as much as you like to your children if they are below 18 years old. But if they put the money in the bank and earn interest, then they can only earn up to £100 in interest. To get around this, you can consider making use of a Junior ISA.
A Junior ISA does not have the £100 interest limit, and the account holder does not pay tax on interest on the cash they save (for cash Junior ISA), or the account holder does not pay tax on any capital growth or dividends they receive (for stocks and shares Junior ISA).
At present, you can contribute £4,368 a year to a Junior ISA account. The amount you can contribute is usually increased every year, meaning by the time your child reaches 18, they are likely to have a substantial amount of savings in their Junior ISA account for which they do not have to pay tax on interest earned.
When it comes to inheritance tax, how much can you give to your children tax-free is one of the questions we are asked regularly. The answer lies in how well you plan.
You can give your children £3,000 worth of gifts a year tax-free as long as the gift takes place seven years before your death. This is known as annual exemption. If the years between gift and death is less than seven years, a tiered-tax system applies. Visit this HMRC page if you would like more information.
When you pass, the first £325,000 of what you own is not taxed. But anything above this amount is subject to 40% inheritance tax. The threshold is increased to £475,000 if you give away your home to your children or grandchildren.
Often you will see an oversimplified example using a house that you own to illustrate inheritance tax. In reality, your estate is likely to include more than a house. If you are a small business owner, any ownership of a business, or share you own in a business, is considered your estate and is subject to inheritance tax. But – here is the bit that requires some planning – your family members can benefit from Business Relief (either 50% or 100%) on some assets (property, building, machinery and unlisted shares) in your estate which you pass on to them either when you are alive or as part of your will. If you would like to know more about inheritance tax and business relief, get in touch with us today by calling 020 8108 0090.
Capital Gains Tax
As the name suggests, Capital Gains Tax applies when you sell something that has increased in value. There are many ways to lower your capital gains tax legitimately, including making use of annual exemptions, making gains through an ISA, pension and investment bonds, transferring the asset to your spouse, switching asset class, reducing your taxable income, and investing in small companies to name but a few. As there is no one-size-fits-all approach, it is best that you talk to one of our experienced chartered accountants first.
Planning for the future
Family tax planning is an excellent method of ensuring that you, your partner and your children will benefit from the many allowances and exemptions that are available in both the short-term and the long-term – including contingency plans that will protect your family in the event that something happens to you.
However, in order to fully utilise the breadth of opportunities available as part of a family tax planning strategy, such strategies should not be approached without the advice of a professional who has experience in tax planning for families. At Tax Agility, our team of experienced chartered accountants can work with you to navigate the complicated world of tax planning, help you to explore the available options, and ensure that you have the best strategy in place for your family.
In order for us to implement the most effective strategy for your family, we need to understand your financial position first. For this reason, we offer our first consultation free of charge to allow us to learn about your family’s financial circumstances and create an effective accounting solution.
Simply get in touch on 020 8108 0090 or contact us via our Online Form today, so that we can create a strategic family tax planning guide to suit your needs.
This article was first published in 2014 and has been updated on 14/08/19.
If you found this helpful, take a look at:
- Everything you need to know about corporate tax
- Tax Planning and your Personal Allowance
- Accounting tips for small businesses
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.