Looking at household income in the round, and planning to make optimal use of all allowances available is likely to create the most tax-efficient solutions.
You and your spouse
The income of each spouse is taxed separately, with each party being entitled to a personal allowance. Capital gains are also taxed separately, each party having their own annual exemption (see below).
Where you each have a different tax band, a key part of planning is getting the right distribution of income between you. This can ensure that the personal allowance of the lower income spouse is not wasted, and give access to lower tax bands. Transferring income-producing assets, such as property, stocks and shares, or even bank accounts, can be an efficient way to do so. Anti-avoidance legislation exists in this area, and we recommend taking advice prior to any action, to ensure that any arrangements are compliant. It is important, for example, that the transfer is an outright
gift, with the donor no longer exerting control over it, or deriving a benefit from it. Appropriate evidence of such transfer is needed.
Planning potential: allocate income
An optimal allocation of income between spouses can only become more important in the future, especially with the fall to the additional rate (top rate in Scotland) threshold for income tax.
High Income Child Benefit Charge (HICBC)
Where either you or your partner get Child Benefit, and have adjusted net income more than £50,000, the HICBC applies. Note that for the HICBC, ‘partner’ doesn’t just mean spouse or civil partner, but includes someone you live with as if you were married.
The HICBC claws back Child Benefit at a rate of 1% for every £100 of income between £50,000 and £60,000. By the time income is £60,000, all Child Benefit payment is effectively lost. You can disclaim payment in these circumstances, to avoid having to pay the charge: but it is usually recommended that the actual claim itself is continued, in order to maintain eligibility for the State Pension.
If both you and your partner are over the income threshold, HICBC is the responsibility of whoever has the higher income. Where income reaches
£50,000, the taxpayer has an obligation to notify HMRC of their liability to the charge. HMRC may make the initial contact, but this should not be relied upon.
Planning potential: the HICBC
Think tactically where there is discretion over how income is distributed between you and your spouse. £100,000 split equally between you and your spouse, for example, keeps you out of HICBC: if it is all taxable
on one spouse, the benefit of Child Benefit payment is lost. We can help you review ways to reduce or redistribute taxable income in your circumstances.
Tax and your children
Children are treated independently for tax purposes. They have their own personal allowance, annual capital gains tax exemption and their own basic rate tax band and savings band. From a tax perspective, it is usually more efficient for grandparents – rather than parents – to provide funds for investment for under-age children.
When it comes to funding children through university, parental input is increasingly common, and the purchase of housing is something often considered. It is important that any such arrangement is structured correctly. Key questions are who owns and buys the property – whether it is the parents, or the parents and child together, or whether the child isprovided with funds to make the purchase. The tax and legal implications need to be thought through, alongside your personal and family preferences.
Planning potential: the rent-a-room scheme
Children living in a property at university which they own outright, and letting out furnished accommodation in the property, may be able to benefit here. Provided the relevant conditions are met, the scheme could allow them to earn up to £7,500 in rent, free of tax. When added to the personal allowance, this provides scope for £20,070 in tax-free income.
Here to help
Please do not contact us to discuss any of the issues raised here.
For other year end tax planning opportunities including potential for director-shareholders, income tax rates and allowances, savings and investments, capital gains tax and Gift Aid, download our ‘Year End Tax Planning Guide’.
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