Married couples
The tax treatment of married couples applies to same sex couples who have
entered into a civil partnership under the Civil Partnership Act. References to
husband and wife should therefore be read to include civil partners throughout
this briefing.
Splitting income
A review of the split of income between husband and wife may yield tax savings
such as reducing or eliminating higher rate tax liabilities. For a redistribution of
income to be effective there must be an unconditional and outright transfer of the
underlying asset which gives rise to the income.
For example it may be possible to save almost £10,000 in 2009/10 by moving
£43,000 of investment income from an income rich spouse to one with no income.
This level of tax saving is unlikely to be possible for many but savings can still be
made by much smaller transfers of income. Moving just £1,000 of savings income
from a higher rate taxpaying spouse to one with income below the personal
allowance (£6,475) may save £400 this tax year.
Jointly owned assets
Income arising from assets owned jointly but in unequal shares is automatically
taxed in equal shares unless a declaration is made to HMRC stating that the asset
is owned in unequal shares. This election can be made on a Form 17 but must be
made before the income arises.
Consider such a declaration when a new jointly owned asset is acquired.
The exception to the equal splitting rule is dividend income from jointly owned
shares in ‘close’ companies which is split according to the actual ownership of
the shares. Close companies are broadly those owned by the directors or five or
fewer people.
Income tax savings may also be made if you are self-employed. For example,
your spouse could be taken into partnership or employed by the business. This
could be just as relevant for a property investment business producing rental
income as for a trade or profession.
Alternatively a spouse could be employed by the family company. However, the
level of remuneration must be justifiable and payment of the wages must actually
be made to the spouse.
Children
Children have their own allowances and tax bands. Therefore it may be possible
for tax savings to be achieved by the transfer of income producing assets to a child.
Generally this is ineffective if the source of the asset is a parent and the child is
under 18. In this case the income remains taxable on the parent unless the income
arising amounts to no more than £100 gross per annum.
For children born since September 2002 a Child Trust Fund (CTF) has been
introduced. The idea is to encourage tax efficient savings by family and friends,
with the government’s help, to build a nest egg which the child can access once
he or she reaches the age of 18. The government’s initial contribution amounts to
£250 (£500 for low income families) with a further contribution at the same level
once the child reaches age seven. Other contributions of up to £1,200 per annum
can be added to the fund and although there is no tax relief on making the
contributions the fund is tax exempt.
And for those 65 and over
Taxpayers aged 65 and over are able to claim higher personal allowances. The
benefit of these allowances is eroded where income exceeds £22,900. In such
circumstances a move to capital growth or tax free investments may preserve the
higher personal allowances.
Could you benefit from planning ahead?
Each individual has an annual exemption for Capital Gains Tax (CGT) purposes.
This is £10,100 for 2009/10. Review your chargeable assets and consider selling
before 6 April 2010 to utilise the exemption.
is no longer tax effective. However sale by one spouse and repurchase by the other,
or sale outside an ISA and repurchase inside, may achieve the same effect. This
can be done either to utilise the annual exemption or to establish a capital loss to
set against gains.
Children also have their own annual exemption and this may be utilised by
investing for capital growth.
Careful planning could lead to £10,100 of gain per family member being realised
every year tax free.
The current system of CGT
• Certain qualifying business gains are charged at an effective 10% tax rate on
the first £1 million of such gains where Entrepreneurs’ Relief is available.
• A flat rate of CGT of 18% will apply to any other chargeable gains.
• If you have two homes you may be able to make elections to maximise the
‘main residence’ exemption.
• Remember that capital losses can be established by making a claim where
assets no longer have any value - a ‘negligible value’ claim.
• Certain other reliefs may allow you to defer certain types of gain.
Maximising potential income, minimising the extraction costs
A director/shareholder of a family company can extract profits from the company in
a number of ways. The two most common are by way of bonus or dividend. For
every £1,500 retained by the higher rate taxpaying individual, the cost to the
company is £2,000 if a dividend is paid and £2,266 if a bonus is paid. This assumes
the company is liable to corporation tax on its profits at the small companies rate
of 21%. There are other factors which may affect a decision to pay a dividend
including ensuring there are sufficient distributable profits. However, paying a
dividend can often result in significant tax savings.
Making the most of giving
To encourage charitable giving, the government has created a number of ways of
securing tax relief on charitable donations.
Gift Aid is the most common method and applies to cash charitable donations large
or small, whether regular or one-off. The charity currently claims basic rate tax of
20% back from HMRC plus a further 2% supplement.
For the individual donor, who is a higher rate tax payer, a cash gift of £78, (£100
for the charity due to 22% rebate) only costs £58.50, due to the additional 20% tax
relief of £19.50.
Always remember to keep a record of any gifts you make.
It may also be possible to make gifts of quoted shares and securities or land and
buildings to charities and claim income tax relief on the value of the gift. This
may be tax efficient for larger charitable donations.
Individual Savings Accounts
Individual Savings Accounts (ISAs) provide an income and capital gains tax free
form of investment. The maximum investment limits are set each tax year.
Therefore to take advantage of the limits available for 2009/10 the investment(s)
must be made by 5 April 2010.
An individual aged 18 or over may invest in one cash ISA and one stocks and
shares ISA per tax year within the following limits:
• a cash ISA allows you to invest up to £3,600 with one provider only, in any
one tax year
• a stocks and shares ISA allows you the option to invest up to £7,200 with one
provider in any one tax year
• however, if you want to invest in both then the stocks and shares ISA investment
should be capped so that overall you do not exceed the £7,200 limit.
16 and 17 year olds are able to open a cash ISA only.
Other key investments
There is a wide range of National Savings & Investment Bank (NS&I) products, for
example NS&I savings accounts, savings certificates and bonds. These are taxed in a
variety of ways. Some, such as National Savings Certificates, are tax free.
For those whose income may fall in the future, for example due to retirement,
investments deferring income to a subsequent period may be attractive. For example
single premium life assurance bonds and ‘roll-up’ funds can achieve this effect.
The Enterprise Investment Scheme (EIS) allows new equity investment of up to
£500,000 in any tax year in qualifying unquoted trading companies. Income tax relief at
20% is generally available on the investment and capital gains tax exemption is given
for shares held for at least three years.
Furthermore unlimited capital gains realised on the disposal of other chargeable assets
(such as investment property) may be deferred by reinvestment in EIS shares.
A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies.
An investor in the shares of a VCT will be exempt from tax on dividends (although the
tax credits are not repayable) and on any capital gains arising from disposal of the
shares. Income tax relief, currently at 30%, is available on subscriptions for VCT
shares, up to £200,000 per tax year, if the shares are held for at least five years.
There are many opportunities for pension planning but the rules can be complex
in certain circumstances.
Individuals can obtain tax relief on contributions up to £3,600 (gross) per year with
no link to earnings. This makes it possible for non-earning spouses and children
to make contributions to pension schemes.
Tax relief for further contributions is available on up to 100% of earnings as long
as this does not exceed the annual maximum (currently £245,000). Earnings
includes pay, benefits, trading profits and is generally referred to as net relevant
earnings.
The rules include a single lifetime limit (£1.75 million for 2009/10) on the amount
of pension saving that can benefit from tax relief. This lifetime limit is measured
when pension benefits are taken.
and any appropriate action you may need to take.
Disclaimer - for information of users - This briefing 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 contained in this briefing can be accepted by the authors or the firm.
Winter 2009.