Due to individual members of your family being taxed independently it’s possible for you, your husband or wife (or civil partner), and your children to use this to your advantage to reduce the joint size of your family’s tax bill.
Strategic (but non-aggressive) tax planning in this manner can be undertaken whether you’re a contractor, a small to medium-sized (SME) business owner, or you’re employed by another individual or organisation.
We advise you to speak with an accountant (whether us here at Tax Agility, or an equally experienced professional) when undertaking any form of tax planning, however small. For now we have briefly detailed below the three main areas you should consider looking into in an attempt to reduce your family’s overall tax bill.
Take Advantage of the Tax Savings for Couples
Despite being joined in holy matrimony, married couples and civil partners have their own separate tax and savings allowances, yearly capital gains exemption, and basic rate tax bands. This, however, will soon change, slightly, concerning income tax.
Your income tax allowance cannot currently be transferred between you and your spouse (unless you were born before 6 April 1935), though this is due to change from next year.
From April 2015 you will be able to transfer ten percent (£1,050) of your personal allowance to your husband, wife, or civil partner if you personally are not liable to income tax above the basic rate and your spouse doesn’t pay tax at the higher or additional rate. If the transfer is deemed eligible, your personal allowance will be reduced by £1,050 and your spouse’s allowance will be increased by the same amount.
Unfortunately if you don’t use your full personal allowance you may only transfer £210 from your allowance to your spouse’s allowance. We’ll be sure to keep you up to date with these changes and let you know how you can claim once the new policy comes into force.
Capital Gains Tax
You and your spouse’s Capital Gains Tax (CGT) exemption limits are treated separately, with each of you receiving an annual exemption of £11,000 (for 2014-15). Once you reach your exemption limit you’ll be charged either 18% or 28% (or a combination).
To make the best use of your CGT exemption limit be sure to plan in advance to transfer assets to your spouse or place them in joint names before a sale so to minimise any higher rate tax either of you would be charged by making the most of both of your individual CGT exemption allowances. If you’re expecting to receive an especially large gain consider spreading this release over several years to make full use of your tax exemption limit.
Inheritance Tax (IHT) must be paid out of your estate on your death, though the first £325,000 is currently tax free, with the remainder being taxed at 40%. Property transfers between you and your spouse are exempt from IHT.
Upon the second spousal death any nil-rate band exemption that was previously unused on the first death (for example, if £300,000 was used on your death, £25,000 would remain unused) can be added to the tax-free IHT when your husband, wife, or civil partner dies.
You don’t have to pay IHT after your death on small gifts of up to £250 per person per year, or for wedding and civil partnership gifts of £5,000 for parents, £2,500 for grandparents, and £1,000 from anybody else.
Tax Savings Aimed at Children
Your children are seen as independent individuals for most tax purposes, allowing them to receive personal allowances and the same access to a basic rate tax band as you.
In some cases you’ll be able to transfer certain income-producing assets to your child (or children) to utilise their personal allowance. Unfortunately, this only applies to assets producing income of less than £99 a year, as anything over this amount will be taxed on you or your spouse’s tax band (different rules, however, apply for grandparents).
For assets producing income greater than £99 per annum you may choose to place certain assets into a bare trust for your child, the beneficiary. This is a simple way of passing assets to your children, allowing you, the trustee, to look after them until your child is old enough (at 18 in England and Wales, 16 in Scotland) to receive them.
Introduced in 2010 to replace Child Trust Funds (CTF), Junior ISAs have been popular from the word go due to their higher interest rates (some offer rates double that of even the highest CTF), with Chancellor George Osborne announcing during his March 2014 Budget that 300,000 children currently hold a Junior ISA.
Available to all UK residents under the age of eighteen who don’t have a Child Trust Fund, Junior ISAs (like standard ISAs) can consist of cash, stocks/shares, or a combination of both, with the current tax-free limit set at £4,000 a year. For those who already have a Child Trust Fund, you will have the option to transfer these savings to a Junior ISA from April 2015.
It should be noted that a Child Tax Credit (CTC) is available for eligible families.
Breakdowns of Marriage
The breakdown of your marriage is a devastating ordeal for anybody to have to go through. Unfortunately marriage breakdowns also have significant tax implications for you and your former spouse in terms of the tax allowances available to you, and your ability to transfer assets between one another.
If you have children, whichever parent (you or your former spouse) is regularly separated from their children must pay child maintenance financial support to help pay for your child’s everyday living costs.
Regardless of whether you and your former spouse agree on these arrangements yourselves (known as a family-based arrangement) or you rely on the Child Maintenance Service or Child Support Agency (CSA) to make these arrangements for you, in most circumstances no tax relief is due on these payments.
Transfer of Assets
If your marriage breaks down you and your former spouse should be careful in the way you transfer former joint assets between one another so to lessen your individual Capital Gains Tax (CGT) liabilities.
You’re advised to transfer choice assets while you’re still living together, as any assets transferred between spouses still living under the same roof in this scenario are said to be transferred at a sales price that doesn’t encourage a gain or a loss, though this only stays in place for the duration of the tax year in which you separate.
Tax Planning for Families
To speak with a professional to discuss ways to reduce the size of your family’s tax bill, among other things, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.