As we approach the end of another tax year on 5 April 2019, it is a good time to make sure that your finances and tax position are structured as efficiently as possible. There may be steps which can be taken now to minimise your tax liability or optimise choices for the future.
The next in our Year End Tax Planning series looks at tax and the family.
Throughout this text, the term spouse includes a registered civil partner. We have used the rates and allowances for 2018/19.
As each spouse is taxed separately, tax planning involves making best use of the personal allowance (PA); the starting and basic rate tax band; Savings Allowance (SA) and Dividend Allowance. The aim is to distribute income within the family to take maximum advantage of these. There is also the possibility of making gifts of assets to distribute income more evenly – but gifts must be outright and unconditional. Sometimes an alteration in timing can be critical, and it may be possible to even out the flow of income between one year and the next.
Change to rates and bands
In the tax year 2018/19, the PA is £11,850. Budget 2018 announced that this would rise to £12,500 in 2019/20, a year earlier than expected. The basic rate band is £34,500 for 2018/19, rising to £37,500 for 2019/20. With the PA, the threshold at which taxpayers start paying higher rate tax becomes £46,350 for 2018/19, and £50,000 for 2019/20.
Additional rate tax is payable on taxable income above £150,000 for all UK residents.
Different rates apply to taxpayers who are resident in Scotland.
Tip: Transferring just £1,000 of savings income from a higher rate (40%) tax-paying spouse, who has used their SA in full, to a basic rate spouse with no other savings income may save up to £400 a year.
A Junior ISA or Child Trust Fund (CTF) account offers tax free savings opportunities for children. The Junior ISA is available for UK resident children under the age of 18 who do not have a CTF. In 2018/19, both CTF and Junior ISAs allow parents, other family members or friends to invest up to £4,260 yearly in a tax free fund. There are no government contributions and no access to the funds until the child reaches 18.
High Income Child Benefit Charge
If you receive Child Benefit, it is important to remember that taxpayers with adjusted net income in excess of £50,000 during the tax year are liable to High Income Benefit Charge. If both partners have income above this level, the charge applies to the partner with the higher income.
The charge is 1% of the full Child Benefit award for every £100 of income between £50,000 and £60,000. Where income is more than £60,000, effectively all Child Benefit is lost. You can elect not to receive Child Benefit if you or your partner prefer not to pay the charge.
When someone becomes liable to the charge, they are required to notify HMRC: it is not something that HMRC will automatically set in progress. Since the partner liable to the charge is not necessarily the partner in receipt of the Child Benefit, potential problems can arise. It is not uncommon for example, for partners to be unaware of the exact level of the other’s income and so unaware of their duty to notify. There can also be problems in a marriage break up, with ex-partners needing to share financial details. Please contact us for further advice.
Appropriate strategies to keep each parent’s income below £50,000 can be considered here. If two parents have income of £50,000 for example, the household can receive full Child Benefit. But if one parent receives all the income, and the other none, all Child Benefit is lost.
Children: using allowances and rate bands
For tax purposes, children are treated independently. They have their own PA, and their own savings and basic rate tax band.
They also have their own capital gains tax (CGT) annual exemption. In some cases, there can be a tax saving by transferring income producing assets to a child. However, when shifting income from a parent to a child who is a minor, any income in excess of £100 will still be taxed on the parent. It is thus not always possible to use a child’s PA by means of a parent transferring income producing assets.
Tip: There may be potential to divert income from grandparents or other relations, to take advantage of a child’s PA.
Income from jointly-owned assets
Any income arising from assets jointly owned by spouses is usually assumed to be shared equally for tax purposes. This is the case even if an asset is owned in unequal shares – unless an election is made to split the income in proportion to ownership. Dividend income from jointly-owned shares in ‘close’ companies (broadly speaking, companies owned by the directors or five or fewer people) is an exception. This is split according to actual ownership of the shares. This means that if, say, one spouse is entitled to 95% of the income from jointly owned shares, they pay tax on 95% of the dividends from the shares.
If you work for yourself, consider employing your spouse or taking them into partnership. This can redistribute income tax efficiently, and can be just as relevant for a property investment business producing rental income as for a trade or profession.
Care is always important in this area. HMRC is likely to scrutinise payments to family members to check that they are commercially justifiable. It is also important that wages are actually paid, not just bookkeeping entries.
Significant tax consequences can arise on separation and divorce. The availability of tax allowances, and transfers of assets between spouses are key areas for consideration.
Transferring assets between spouses can have CGT consequences unless the timing of transfers is carefully planned. This however, is not always possible in the circumstances. Where an asset is transferred between spouses who are living together, it is deemed to be transferred at a price giving rise to neither a gain nor a loss. This applies up to the end of the tax year in which marital separation occurs. Where a transfer takes place after the end of the tax year of separation, transactions are treated as taking place at market value. This potentially creates capital gains which may not qualify for deferral relief.
Tip: If practical, couples separating during the tax year should consider transferring assets before 5 April.
Giving to charity
If you make a charitable donation under the Gift Aid scheme, the charity can claim back 20% basic rate tax on any donations. Using Gift Aid can also generate a refund for higher rate and additional rate taxpayers. Higher rate taxpayers can claim back the tax difference between the higher rate and basic rate on the donation. A cash gift of £80 thus generates a refund of £20 for the charity, which receives £100. The donor claims back tax of £20, making the net cost of the gift only £60 (or £55 for an additional rate taxpayer).
Tip: Tax relief against 2018/19 income is possible for charitable donations made between 6 April 2019 and 31 January 2020, providing payment is made before filing the 2018/19 tax return.
Donors may need to check that they have paid enough tax (including CGT) to cover the Gift Aid claim, as otherwise the difference will need to be paid back to HMRC on their tax return.
Tip: Making a charitable donation under Gift Aid reduces income when it comes to possible restriction of the personal allowance. It is thus most beneficial for such gifts to be made by the higher rate spouse.
Please do contact us for a review of your individual circumstances.