Taxation of the Family
Married couples are subject to a system of independent taxation which means that husbands and wives are taxed separately on their income and capital gains The effect is that both have their own allowances and tax bands for income and capital gains tax (CGT) purposes and are responsible for their own tax affairs.
Where an individuals income is above £100,000 their allowances are gradually reduced
Children are independent people for tax purposes and are therefore entitled to their own allowances and tax bands. It may be possible to save tax by generating income or capital gains in the children’s hands.
Separation and divorce can have significant tax implications. In particular, the following areas warrant careful consideration
- current and future tax allowances • transfers of assets between spouses.
• Married Couples
• Everyone is entitled to a basic personal allowance. This allowance cannot be transferred between spouses. Where one spouse was born before 6 April 1935, a married couple’s allowance is available This is generally given to the husband although it is possible, by election, to transfer it to the wife.
• In general, married couples should try to arrange their ownership of income producing assets so as to ensure that personal allowances are fully utilised and any higher/additional rate liabilities minimised. Generally, when husband and wife jointly own assets, any income arising is assumed to be shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset.
• The one exception is dividends from jointly owned shares in ‘close’ companies which are taxed according to the actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people. For example if a spouse is entitled to 95% of the income from jointly owned shares that spouse will pay tax on 95% of the dividends Irom those shares. This measure is designed to close a perceived loophole in the rules and does not apply to income from any other jointly owned assets.
• Throughout the tax treatment of married couples extends to same-sex couples who have entered into a civil partnership under the Civil Partnership Act.
• It may be possible for tax savings to be achieved by the transfer of income producing assets to a child so as to take advantage of the child’s personal allowance, starling rate (10%) and basic rate (20%) tax bands.
• This cannot be done by the parent if the annual income arising is above £100 (gross). The income will still be taxed on the parent. However, transfers of income producing assets by others (eg grandparents) may still be effective.
• Children or any other person whose personal allowances exceed their income are not liable to tax. Where income has had tax deducted at source, a repayment claim should be made. Remember that tax credits on dividends are not repayable.
Each spouse’s CGT liability is computed by reterence to their own disposals of assets and each is entitled to their own annual exemption, currently £10,100 If the disposal was made before 23 June 2010 gains above this level are charged to tax at a flat rate of 18% For disposals arising on or ofter this date the gains will be charged to tax at a rate of 18%, 28% or a combination of both rates, dependant on an individuals total taxable gains and income
• CGT savings may be made by ensuring that maximum advantage is taken of annual exemptions.
• This can often be achieved by transferring assets between spouses before sale – a course of action generally having no adverse CGT or inheritance tax (IHT) implications Advance planning is vital and the possible income tax effects of transferring assets should not be overlooked
• A parent can allow a child to use any entitlement to the CGT annual exemption by using a ‘bore trust’, ie on arrangement whereby a beneficiary has an absolute right to property and income but the trustees are the legal owners.
Child Trust Fund
The Child Trust Fund was introduced from April 2005 for all children born from 1 September 2002 The government provides an initial endowment of £250 (£500 for low income families) and further such payments at the age of seven. Other features of the fund include:
allowing additional contributions to be made by others (family and friends) of up to £1,200 a year, although there is no tax relief for contributions made to a CTF account
Marriage breakdown often involves the transfer of assets between husbands and wives. Unless the timing ot any such transfers is carefully planned there can be adverse CGT consequences.
If an asset is transferred between a husband and wife who are living together, the asset is deemed to be transferred at a price that does not give rise to a gain or a loss This treatment continues up to the end of the tax year in which the separation takes place.
CGT can therefore present a problem where transfers take place after the end of the tax year of separation IHT, on the other hand, will not cause a problem if transfers take place before the granting of a decree absolute on divorce. Transfers after this date may still not be a problem as often there is no gratuitous
Child Tax Credit
The Child Tax Credit is means tested and potentially available to families who have responsibility for one or more children not being taxable on the income and gains they make on the investments in their CTF account
• funds accessible at age 18.
From April 2010 the government will make payments of £100 per year into the Child Trust Fund accounts of all disabled children. Severely disabled children (those who receive the High Care element ot Disability Living Allowance) will receive £200 per year. These payments will not count towards the £1,200 yearly contribution limit.
The government have announced that it intends to reduce and then stop payments to these accounts. The details of the current proposals are
• The initial payment and the additional payment for low income families will be reduced to £50 each for children born between August and December 2010.
• Children born from January 2011 will not qualify for an account.
• The further payments made at the age of seven will cease for children whose 7th birthday is offer 31 July 2010.
How We Can Help
- This article gives general advice regarding the taxation of the family but it is always necessary to tailor any advice to your personal situation therefore if you are need advice regarding the taxation of your family then please call Keith Rogers Accountants on +44 (0) 20 3145 0995 so we can arrange a No obligation FREE initial meeting at one of our offices. If you are interested in instructing us we will offer you a FIXED FEE service with no hourly charges or hidden costs. You will have unlimited telephone support during our opening hours to assist you in making the correct strategic decisions. If you wish to view the other services that Keith Rogers Accountants offer then please visit our website KRA-Uk.com