Each spouse is taxed separately so it is an important element of basic income tax planning that maximum use is made of personal reliefs and the starting and basic rate tax bands. Given that the personal allowance cannot be transferred between spouses it may be necessary to consider gifts of assets (which must be outright and unconditional) to distribute income more evenly. Currently a transfer of just £1,000 of savings income from a higher rate (40%) taxpaying spouse to one with income below the personal allowance (£8,105) may save up to £400 a year. For those paying the additional rate of tax (50%), which applies to those with taxable income above £150,000, the saving maybe £500 a year.
Income from jointly owned assets is generally shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset. The exception is divided income from jointly owned shares in ‘close’ companies which is split according to the actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people.
If you are self-employed or run a family company, consider employing your spouse or taking them into partnership as a way of redistributing income. This could be just as relevant for a property investment business producing rental income as for a trade or profession.
Care must be taken because HMRC may look at such situations to ensure that hey are commercially justified. If a spouse is employed by the family business, the level of remuneration must be justifiable and the wages actually paid to the spouse. The National Minimum Wage rules may also impact.
Throughout this supplement the term spouse includes a registered civil partner.
If you are in receipt of Child Benefit and either you or your live in partner (widely defined) have income above £50,000 then it is possible that you may have to pay back some or all of the benefit through a new tax charge that applies from 7 January 2013. If you think this may affect you please contact us as it might be possible to reduce the impact of this new tax charge. This could be achieved by reducing income for this purpose. Examples include making additional pension contributions or charities donations or reviewing how profits are shared and extracted from the family business.
Those aged 65 and over
Taxpayers aged at least 65 should consider how to make full use of the available age allowances. The higher allowances are gradually withdrawn once income exceeds £25,400.
From 2013/14 the higher personal allowances will be frozen at their existing amounts and their availability restricted as follows:
- The higher personal allowance of £10,500 will be available to people born after 5 April 1938 but before 6 April 1948 and
- The higher personal allowance of £10,660 will be available to people born before 6 April 1938.
Consider switching to non-taxable or capital growth oriented investments to avoid losing out on allowances.
Children have their own allowances and tax bands. Therefore it may be possible for tax savings to be achieved by the transfer of income producing assets to a child. Generally this is effective if the source of the asset is a parent and the child is under 18. In this case the income remains taxable on the parent unless arising amounts to no more that £100 gross per annum.
Consider transfer of assets from other relatives (eg grandparents) and/ or employing teenage children in the family business to use personal allowances and the basic rate tax band.
Remember that children also have their own capital gains tax (CGT) annual exemption (£10,600). It may be better for parents to invest for capital growth rather than income.
To encourage the idea of a ‘nest egg’ being available for a child when they reach 18, the Government have included the Junior Individual Savings Account (Junior ISA) for children born from 3 January 2011 which effectively replaces the Child Trust Fund (CTF) accounts.
Existing CTF accounts continue alongside the Junior ISA (a child can only have one type). Both CTF and Junior ISA accounts allow parents, other family members and friends to invest up to £3,600 annually in a tax free fund for a child. There are no Government contributions and no access to the funds until the child reaches 18.
Children or any other person whose personal allowances exceed their income are not liable to tax. Where income has suffered a tax deduction at source a repayment claim should be made. In the case of bank or building society interest, a declaration can be made by non-taxpayers to enable interest to be paid gross (form R85).
A 10% tax rate may apply to savings income. If the only or first source of taxable income is bank or building society interest, then up to the first £2,710 is liable to tax at only 10%. If 20% tax has been deducted at source a repayment may be due.
Tax credits on dividends are not repayable so non-taxpayers should ensure that they have other sources of income to utilise their personal allowances.