Personal
Tax
Taxation
of the Family
Married
couples are subject to a system of independent taxation under
which husbands and wives are taxed separately. This can give
rise to valuable tax planning opportunities. Furthermore,
the tax position of any children is important.
Marriage breakdowns can also have a considerable impact for
tax purposes.
We highlight below the main areas of importance where advance
planning can help to minimise overall tax liabilities.
It is important that professional advice is sought on specific
issues relevant to your personal circumstances.
Setting
the Scene
Married
couples
Since 1990, independent taxation has meant that husbands and
wives are taxed separately on their income and capital gains.
The effect is that both have their own allowances, lower and
basic rate tax bands for income and capital gains tax purposes
and are responsible for their own tax affairs.
Children
A child is an independent person for tax purposes and is therefore
entitled to a personal allowance and a full starting rate
and basic rate tax band before being taxed at the higher rate.
It may be possible to save tax by generating income or capital
gains in the children's hands.
Marriage breakdown
Separation and divorce can have significant tax implications.
In particular, the following areas warrant careful consideration:
- current
and future tax allowances
- transfers
of assets between spouses.
Tax
Planning for Married Couples
Income
tax allowances and tax bands
Everyone is entitled to a basic personal allowance. This allowance
cannot however be transferred between spouses.
If either you or your spouse were born before 6 April 1935,
a married couple's allowance is available. This is given to
the husband, although it is possible, by election, to transfer
it to the wife.
Joint ownership of assets
In general, married couples should try to arrange their ownership
of income producing assets so as to ensure that personal allowances
are fully utilised and any higher rate liabilities minimised.
Generally, when husband and wife jointly own assets, any income
arising is assumed to be 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.
From 6 April 2004, married couples are taxed on dividends
from jointly owned shares in ‘close’ companies according
to their actual ownership of the shares. Close companies are
broadly those owned by the directors or five or fewer people.
For example if a spouse is entitled to 95% of the income from
jointly owned shares they will pay tax on 95% of the dividends
from those shares. This measure is designed to close a perceived
loophole in the rules and does not apply to income from any
other jointly owned assets.
We can advise on the most appropriate strategy for jointly
owned assets so that tax liabilities are minimised.
Capital gains tax (CGT)
Each spouse's CGT liability is computed by reference to their
own disposals of assets and each is entitled to their own
annual exemption, currently £8,200 per annum. Gains
above this level are charged to tax by treating them as the
top slice of income.
Considerable tax savings may be made by ensuring that maximum
advantage is taken of annual exemptions, the starting rate
of tax (10%) and the lower rate of tax (20%).
This can often be achieved by transferring assets between
spouses before sale - a course of action generally having
no adverse CGT or inheritance tax (IHT) implications. Advance
planning is vital, and the possible income tax effects of
transferring assets should not be overlooked.
Inheritance tax (IHT)
When a person dies IHT becomes due on their estate. Some lifetime
gifts are treated as chargeable transfers but most are ignored
providing the donor survives for seven years after the gift.
The rate of tax on death is 40% and 20% on lifetime chargeable
transfers. The first £263,000 is not chargeable.
Gifts between husband and wife are generally exempt. It may
be desirable to use the spouse exemption to transfer assets
to ensure that both spouses can make full use of lifetime
exemptions and the nil rate band.
A gift for family maintenance does not give rise to an IHT
charge. This would include the transfer of property made on
divorce under a court order, gifts for the education of children
or maintenance of a dependent relative.
Gifts in consideration of marriage are exempt up to £5,000
if made by a parent with lower limits for other donors.
Children
Use
of allowances and lower rate tax bands
It may be possible for tax savings to be achieved by the transfer
of income producing assets to a child so as to take advantage
of the child's personal allowance.
This cannot be done by the parent if the annual income arising
is above £100. The income will still be taxed on the
parent. However, transfers of income producing assets by others
(eg grandparents) will be effective.
A parent can however allow a child to use any entitlement
to the CGT annual exemption by using a ‘bare trust’.
Child Tax Credit
A Child Tax Credit (CTC) has been available to many taxpayers
since 6 April 2003.
The basic ‘family’ element of the CTC is £545
p.a. The CTC rises to £1,090 in the year a child is
born (the baby addition). But you may receive less than this
if your family income is above £50,000. And you may
receive more than this if your family income is somewhat less
than £50,000 due to other elements of the CTC and/or
if you pay qualifying childcare costs.
We have a separate factsheet which provides more detail. To
see whether you are entitled to claim go to the Revenue website
at www.inlandrevenue.gov.uk
Marriage
Breakdown
Maintenance
payments
An important element in tax planning on marriage breakdown
used to involve arrangements for the payment of maintenance.
Since 6 April 2000 there has been only limited tax relief
for some taxpayers over 65.
Asset transfers
Marriage breakdown often involves the transfer of assets between
husbands and wives. Unless the timing of any such transfers
is carefully planned there can be adverse CGT consequences.
If an asset is transferred between a husband and wife who
are living together, the asset is deemed to be transferred
at a price that does not give rise to a gain or a loss. This
treatment continues up to the end of the tax year in
which the separation takes place.
CGT can therefore present a problem where transfers take place
after the end of the tax year of separation but before divorce.
However the Inland Revenue has announced a change of practice
where assets are transferred under a court order which improves
the position.
IHT on the other hand will not cause a problem if transfers
take place before the granting of a decree absolute on divorce.
Transfers after this date may still not be a problem as often
there is no gratuitous intent.
How
We Can Help
Some
general points can be made when planning for efficient taxation
of the family.
Any plan must take into account specific circumstances and
it is important that any proposed course of action gives consideration
to all areas of tax that may be affected by the proposals.
Tax savings can only be achieved if an appropriate course
of action is planned in advance. It is therefore vital that
professional advice is sought at an early stage. We would
welcome the chance to tailor a plan to your own personal circumstances.
Top
of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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