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Tax strategies for you and your family

Here's where we can advise
  • Understanding your tax allowances and rates
  • Making the most of tax free opportunities
  • Keeping tax rates as low as possible across the family
  • Using savings, capital and the Junior ISA to give your children a better start in life
  • Making a Will
  • Making a living will and giving someone you trust an enduring power of attorney over your affairs
  • Insuring your life and obtaining disability and critical illness insurance
  • Saving for income and investing for capital growth

 

Realising your goals

No matter what your age, personal or financial status, you will have dreams, and expectations. The impact of the flat economy and the threat of further volatility necessitate a review in order to evaluate the current state of your medium and long term planning. What, if any, adjustments are required? We can advise and help you adjust your plans so that you can make your [updated] goals a reality. It may seem like a formidable task, when you consider that you may need to plan for the costs of raising your children, saving for their education and maybe even providing some assistance for the purchase of their first home. Your planning may also need to take into account:

  • Helping to care for and support ageing parents,
  • Achieving the standard of living you want for your household, and
  • Funding your retirement.

But, as you will find in this guide, there are plans you can make and steps you can take which will start you on the road to realising your goals.

Basic principles

Let's start by looking at some of the worthwhile strategies you could apply within the family.

Each member of your family is taxed as an individual - entitled to his or her own allowances and exemptions.

For 2012/13

Income Earnings, etc Savings UK Dividends
First £8,105 Tax-free2 Tax-free 10%
Next £2,710 20% 10%/20%1 10%
Next £31,660 20% 20% 10%
Next £115,630 40% 40% 32.50%
Above £150,000 50% 50% 42.50%
Capital gains
First £10,600 Tax-Free
Remainder 10% when Entrepreneurs' relief is claimed
18% when chargeable income and gain are below £34,370
28% when chargeable income and gain are above £34,370
  1. The first £2,710 of savings income is taxed at 10% provided taxable non-savings income does not exceed £2,710.
  2. This allowance is progressively withdrawn at a rate of £1 for every £2 of income. There is no personal allowance where income exceeds £116,210.

Allowances and rate bands are allocated first to your earned income (which includes pensions), then to your savings income, then to any UK dividend income. If your non-savings income exceeds £2,710, the savings rate of 10% does not apply.

The additional rate of 50% reduces to 45% from April 2013.

Case study

Paul is a single person with a gross income of £55,000 (made up of £30,000 earnings, £4,000 of interest, grossed-up UK dividends of £10,000 and capital gains of £11,000 (assuming no other reliefs, etc) would have a tax liability of £6,634.13 as shown below.

  Earnings £ Interest £ UK Divs £ Gains £
Income 30,000 4,000 10,000 11,000
P. A. 8,105      
CGT exempt       10,600
Taxable 21,895 4,000 10,000 400
Tax at 20% on 21,895 4,000    
10% on     8,475  
32.5% on     1,525  
28%       400
Total Tax Liability
£6,634.13 £4,379.00 £800.00 £1,343.13 £112.00

For those 65 and over

The personal allowance for 2012/13 for those aged 65 to 74 at 5 April 2013 is £10,500, and for those aged 75 or over it increases to £10,660. Both higher allowances are scaled back if income exceeds £25,400, but in any event the minimum personal allowance is £8,105 unless income exceeds £100,000.

From April 2013, no new claims for these allowances will be possible. Existing claimants will have the value of these age-related allowances frozen at their current cash values.

Married couple's allowance at 10% is available to married taxpayers and those in a civil partnership when the elder partner or spouse was born before 6 April 1935. The married couple's allowance may be scaled back if the husband's income (or, for marriages and civil partnerships, if the income of the spouse or partner with the most income) exceeds £25,400. The allowance is subject to a minimum value of £296.

Age at 5 April 2013 Personal allowance Maximum married couple's allowance worth
65 - 74 £10,500  
75 £10,660  
Elder spouse born before  6 April 1935 £770.50
Minimum   £296.00

Planning objectives include:

  • Making the most of your tax free allowances
  • Keeping your marginal tax rates as low as possible
  • Maintaining a spread between your income and capital

Remember that all tax planning must:

  • save tax overall. Do not, for example, save stamp duty land tax at 3% only to pay more capital gains tax at 28%
  • not cost more than the tax you will save
  • be flexible enough to cope if tax law changes, and
  • not impose conditions or restrictions that you find unacceptable.

Create opportunities to save tax

The implementation of decisions can be hindered by the potential for tax charges to arise when assets are moved between family members. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to capital gains tax (CGT) and inheritance tax (IHT).

Even if you do give away an asset to a family member, you could be caught by the ‘pre-owned assets' rules. For example if you give away a car or yacht to a son or daughter and then use it again, you could find these trigger an unexpected tax charge. If you think this may apply to you, please discuss the matter with us.

However, there is normally no tax charge on transfers of assets between spouses living together*, or between separated spouses in the tax year in which separation occurs. We can help you to create opportunities to reduce your marginal tax rates by careful identification of appropriate strategies.

Situation Possible strategy Possible result
Income from assets taxed at 40% Transfer to spouse if he/she pays tax at lower rates
Transfer into joint names		 Tax @ 40% reduced to 20% or less
Half of income taxed at 20% or less
Proposed sale will give sizeable capital gain Transfer to spouse if he/she can use his/her annual CGT exemption or
spouse has unused CGT losses
Transfer into joint names
Defer sale of 50% until after the end of the tax year		 Further £10,600 (maximum) of gain tax free
Cover part or all of gain with losses
Double exemptions and deferring some tax by 12 months
One spouse rich in assets - wish to make gifts within CGT and IHT limits Transfer to the other spouse, who can then make gifts in parallel Double exemptions

Gifts must be outright to be effective for tax, and must not comprise a right only to income.

* Transfers on or within seven years of death to a spouse domiciled outside the UK are exempt only to the extent of £55,000.

A debt free start for your children

One of the biggest financial challenges facing children today is the quantum of debt they will have incurred by the time they leave University. Surveys suggest that the average student leaving university in 2012/13 will have debts of around £25,000. However, for those entering University now, it is very likely that on a four year course their debt when they graduate will exceed £40,000, due to the impact of the increase in tuition fees in 2012. The Government is increasing student fees and this will have the inevitable knock-on effect of increasing student debt.

For younger children, ongoing payments into a Junior ISA may create the opportunity for parents, grandparents and other family members to build a fund to help offset University expenses and minimise debt at the start of your child's working life.

Remember that all children have their own personal allowances meaning that their income up to £8,105 escapes tax this year provided the capital does not originate from parental gifts. If income arising on parental gifts exceeds £100, the parent is taxed on it unless the child has reached 18, or is married. Thus parental gifts in excess of, roughly, £3,000 in total should perhaps be invested in something which produces tax-free income, or which accumulate income, or in a Junior or Cash ISA. The £100 limit on income does not apply to income on gifts into a National Savings Children's Bonus Bond.

Generation skipping

Income from capital gifted by grandparents or other relatives will be taxed as the child's, as will income distributions from a trust funded by such capital.

Marriage breakdown

Tax relief worth up to £296 this year is given on maintenance paid to a former spouse under orders or enforceable agreements, so long as at least one of the former parties to the marriage was born before 6 April 1935. Otherwise, maintenance payments do not qualify for tax relief. Maintenance payments received under orders or agreements are not taxable.

The special CGT/IHT treatment for transfers between spouses applies throughout the tax year in which separation occurs. 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 until the date of decree absolute, after which former spouses are no longer regarded as connected.

There are, therefore, arguments for and against making transfers as quickly as possible after separation, or for delaying them until after the decree absolute. Contact us if you are not sure which course to take.

In particular, the potential tax burden on the disposal of the former marital home as a result of separation and divorce can be significant, and may be something about which you need specific advice.

Financial protection for your family

How would your spouse and children manage if you died or were incapacitated tomorrow?

Beyond taking the obvious step of ensuring you have adequate insurance cover, with life assurance written into trust for your spouse or children to ensure quick access to funds, you need to make a Will. Despite repeated campaigns, it is believed that three-quarters of adults still do not have an up-to-date Will. If you die without a Will, the law determines who receives your estate.

We would also strongly recommend that you:

  • Make a living Will - so you can make clear your wishes in the event that, for example, you are pronounced clinically dead following an accident, and
  • Execute - so that if, whether as a result of an accident or illness, you become incapable of managing your affairs, you can be reassured that responsibility will pass to someone you choose and trust.

Of course all this also applies for your spouse, and to those who are in civil partnerships. You should also consider the possibility that both parents may be simultaneously killed or incapacitated.

A Will should be reviewed regularly. Beneficiaries may die; new beneficiaries may have been born. Your wishes and values may have changed.

Remember that marriage usually revokes any Will you have made. Divorce usually excludes your former partner as a beneficiary. These are occasions when you may wish to consider updating your Will.

On a practical note, tell your spouse, your parents, and your business partners where your Will and any related documents are kept - it is still up to you whether or not you tell them what the documents contain, but if you are passing responsibility for managing your affairs on to others, it would be advisable to talk matters through with them now.
It is also advisable to tell your family members whenever you change your Will. Should you tell them what assets you have and how they can be located?

A shot in the dark?

It is estimated that about £15 billion is 'lost' including £400 million in dormant accounts, £400 million in pensions and life products, £3 billion in shares and dividends and £1 billion in national savings. In addition there is over £31 million in unclaimed premium bond prizes. To see if you have a lost policy or investment you may contact the Unclaimed Assets Register on 0844 481 81 80. A fee applies for this service at a current rate of £25 per search. Log on to www.nsandi.com to see if you have an unclaimed premium bond prize.