Tax strategies for you and your family
Reaching your financial goals
Every client is unique and will have particular financial needs and goals. You might simply want to maximise your wealth so that you can enjoy more of your hard-earned money now and in retirement. You might need to pay for your children's education, or to help support ageing parents. Or perhaps all of the above apply. As your accountants, we can suggest practical ways to help make these objectives become reality.
Using exemptions and allowances
Each individual within your family is taxed separately, and is entitled to his or her own allowances and exemptions. The basic personal allowance for 2015/16 for those born after 5 April 1938 is £10,600, while the capital gains tax annual allowance for 2015/16 is £11,100.
A series of rate bands and allowances are assigned first to your earned income (which includes pensions), then to your savings income, and finally to any UK dividend income.
Planning within the family
By using the available personal allowances and gains exemptions, a couple and their two children could have income and gains of at least £86,800 tax-free, and income up to £169,540 before paying any higher rate tax. Through careful tax planning, we could help you and your family to benefit from more of your wealth.
Your tax planning objectives should include taking advantage of tax-free opportunities, keeping marginal tax rates as low as possible, and maintaining a spread between income and capital.
Income tax and capital gains tax rates for 2015/16
|Rate Band||Taxable Income||Earnings etc||Savings||Dividends|
|Basic||Up to £31,785||20%||10%/20%*||10%|
* There is a 0% starting rate for savings income up to the starting rate limit (£5,000) within the basic rate band. Where taxable non-savings income does not fully occupy the starting rate limit the remainder of the starting rate limit is available for savings income.
** Personal allowance is reduced by £1 for every £2 that adjusted net income exceeds £100,000. The effective marginal rate in this band is 60% (dividends 48.75%).
*** Depends on the level of income and gains.
Transferable Tax Allowance
From 6 April 2015 some married couples and civil partners are eligible for a new Transferable Tax Allowance, enabling spouses to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner (£1,060 for the 2015/16 tax year). For those couples where one person does not use all of their personal allowance the benefit will be up to £212 (20% of £1,060).
Starting rate of tax for savings income
From 6 April 2015, the maximum amount of an eligible individual's savings income that can qualify for the starting rate of tax for savings is increased from £2,880 to £5,000, and this starting rate is reduced from 10% to 0%. These rates are not available if taxable non-savings income (broadly earnings, pensions, trading profits and property income) exceeds the starting rate limit.
Ella is a single person with a gross 2015/16 income of £45,600 (made up of £25,600 earnings, £5,000 of interest and grossed up UK dividends of £15,000) and capital gains of £11,200 (assuming no other reliefs, etc). She would have a tax liability of £6,251.38.
|Income and gains||25,600||5,000||15,000||11,200|
|Deduct: Personal allowance||- 10,600|
|Deduct: CGT exemption||-11,100|
|Total tax liability||£6,251.38|
Personal Savings Allowance
A new Personal Savings Allowance will apply to income such as bank and building society interest from 6 April 2016. The allowance will apply for up to £1,000 of a basic rate taxpayer's savings income, and up to £500 of a higher rate taxpayer's savings income each year. The Personal Savings Allowance will provide basic and higher rate taxpayers with a tax saving of up to £200 each year. The allowance will not be available for additional rate taxpayers and will be in addition to the tax advantages currently available to savers from ISAs.
Planning can be hindered by the potential for tax charges to arise when assets are moved between members of the family. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to CGT and IHT.
However, special rules govern the transfer of assets between spouses. In many cases for both CGT and IHT there is no tax charge, but there are some exceptions - please contact us for further advice. In addition, gifts must be outright to be effective for tax, and must not comprise a right only to income. Careful timing and advance discussion with us are essential.
The 45% and (hidden) 60% rates
The top rate of income tax, for those with taxable income in excess of £150,000, is 45% (37.5% for dividends). Personal allowances are scaled back if 'adjusted net income' exceeds £100,000. The personal allowance is reduced by £1 for every £2 of income in excess of that limit. This means that an individual with total taxable income of £121,200 or more will not be entitled to any personal allowance. This gives an effective tax rate on this slice of income of 60%.
It may be possible to reduce your taxable income and retain your allowances, if approached with due consideration, eg. by making pension contributions or Gift Aid donations. Contact us now for advice on minimising the impact of the top tax rates.
Another hidden high tax rate
A charge arises on a taxpayer who has adjusted net income over £50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £50,000 the charge applies to the partner with the higher income.
The income tax charge applies at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.
Claimants may elect not to receive Child Benefit if they or their partner do not wish to pay the charge. Equalising income can help to reduce the charge for some families.
David and Helen have two children and receive £1,770 Child Benefit for 2014/15. Helen has little income. David's income is over £60,000 for the 2014/15 tax year. So the tax charge on David is £1,770.
For 2015/16 the Child Benefit for two children amounts to £1,789 per annum. David expects his adjusted net income to be £55,000. On this basis the tax charge will be £895. This is calculated as £1,789 x 50% (£55,000 - £50,000 = £5,000/£100 x 1%).
If David can reduce his income by a further £5,000 no charge would arise. This could be achieved by transferring investments to Helen or by making additional pension or Gift Aid payments.
Cap on reliefs
There is a 'cap' on certain otherwise unlimited tax reliefs (excluding charitable donations) of the greater of £50,000 and 25% of your income. This cap applies to relief for trading losses and certain types of qualifying interest.
Assisting your children financially
University is an expensive prospect these days, and beyond this lies the challenge of finding a deposit for a home. The sooner you start planning for these expenses, the better.
All children have their own personal allowance, so income up to £10,600 escapes tax this year, as long as it does not originate from parental gifts. If income from parental gifts exceeds £100 (gross), the parent is taxed on it unless the child has reached 18, or married. Consequently parental gifts should perhaps be invested to produce tax-free income, or in a cash or stocks and shares Junior Individual Savings Account (JISA).
For younger family members, the JISA offers the opportunity for parents and other family members to build a fund to help offset university expenses and minimise debt at the start of the child's working life. The £100 limit does not apply to gifts into JISAs or National Savings Children's Bonds. From April 2015 pre-existing Child Trust Funds can be converted to JISAs.
The Government has also announced the introduction of a new Help to Buy ISA, which will provide a tax-free savings account for first time buyers wishing to save for a home: please see the 'Savings and investment strategies' section.
If your child is grown up and financially secure, it may be worth 'skipping' a generation as income from capital gifted by grandparents or more remote relatives will usually be taxed as the child's, as will income distributions from a trust funded by such capital.
Maintenance payments do not usually qualify for tax relief. The special CGT and IHT treatment for transfers between spouses applies throughout the tax year in which a separation occurs. For CGT, transfers in subsequent years are dealt with under the rules for disposals between connected persons, with the disposal treated as a sale at market value, which could result in substantial chargeable gains. For IHT, transfers remain exempt until the decree absolute.
Careful consideration as to the timing of such transfers is essential. We can provide advice and assistance in this matter.
Planning for the worst
Proper contingency planning can help to ensure that your spouse and/or children would be able to cope financially if you died or were incapacitated.
One initial step might be to take out adequate insurance cover, perhaps with life assurance written into trust for your spouse or children to ensure quick access to funds. However, it is also important to make a Will. We also strongly recommend that you and your spouse:
- Make a living Will (also called 'advance decisions'): so that your wishes are clear with regard to medical treatment in the event that, for example, you were seriously injured following an accident
- Execute a lasting power of attorney: so that if you become incapacitated and unable to manage your affairs, whether as a result of an accident or illness, responsibility will pass to a trusted person of your choosing.
On a practical note, make sure that you tell your spouse, your parents, and your business partners where your Will and any related documents are kept. It is your choice whether to discuss your affairs in detail, but if you are passing on responsibility for managing your affairs, it might be advisable to talk matters through with them.
Checking for unclaimed assets
Billions of pounds worth of assets lie unclaimed in the UK. To see if you have any lost assets contact the Unclaimed Assets Register on 0844 481 8180 or visit www.uar.co.uk. Please note that a charge applies for this service. To find out whether you have an unclaimed Premium Bond prize, call 0500 007 007 or visit www.nsandi.com.
Non UK domiciles: the current position
A UK resident and domiciled individual is taxed on worldwide income and gains. Non UK domiciles who are UK resident are currently able to claim the remittance basis of taxation in respect of foreign income and gains. This means that they are only taxed if foreign income and gains are brought into the UK. The non UK domicile is also favourably treated for IHT as they only pay IHT in respect of UK assets as opposed to their worldwide assets.
New proposals for non UK domiciles
The Government intends to abolish non UK domicile status for certain long term residents from April 2017. This will only apply where an individual has been resident for at least 15 out of the last 20 tax years. Such individuals will be treated as deemed UK domiciled for all tax purposes.
In addition, those who had a domicile in the UK at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country.
|Checklist: Financial protection strategies||Self||Spouse|
|Lasting power of attorney|
|Keep papers in a safe place - and make sure other people know where they are!|
|Income, mortgage and loan protection insurance|
|Tax-efficient estate planning|
|Planning for the transfer of your business|
|Funeral arrangements and expenses|
|A tax-efficient gift strategy|
Next steps: contact us to discuss...
- Making the most of allowances and reliefs
- Ensuring that your tax liability is kept to a minimum within the law
- Using savings, capital and other vehicles to give your children a better start in life
- Writing a Will
- Life insurance and obtaining disability and critical illness insurance
- Tax-efficient savings and investments