Note: This guide will be updated for the 2014/15 tax year in May.
Planning for yourself and your family
Achieving your objectives
Every individual will have a variety of goals in life, which may include raising children and saving for their education, caring for and supporting ageing parents, attaining a desired standard of living for themselves and their family, and financing their retirement. As your accountants, we can help you to put in place strategies that will help you to achieve your objectives throughout your lifetime.
Whatever your own personal goals may be, there are some fundamental strategies that can be applied within the family, and we begin with these.
Capitalising on allowances and exemptions
Every individual within your family is taxed separately, and is entitled to his or her own allowances and exemptions. The basic personal allowance for 2013/14 is £9,440.
A series of rate bands and allowances are assigned first to your earned income (which includes pensions), then to your savings income, and finally to any UK dividend income.
Are you 65+?
The personal allowance for 2013/14 for those born between 6 April 1938 and 5 April 1948 is £10,500, and for those born before 6 April 1938 it increases to £10,660. Both higher allowances are scaled back if income exceeds £26,100, but in any event the minimum personal allowance is £9,440. The £7,915 married couple’s allowance applies where at least one spouse was born before 6 April 1935 and is given as a tax reduction at 10% of the allowance. It may be reduced if the husband’s income exceeds £26,100. However the minimum tax relief is £304. For marriages taking place on or after 5 December 2005 and for civil partners, it is the income of the spouse or civil partner with the most income which governs the scale back.
|Date of birth||Personal allowance||Maximum married couple’s allowance|
|To 5 April 1938||£10,660|
|6 April 1938 to 5 April 1948||£10,500|
|6 April 1948 onwards||£9,440|
|Elder spouse||Tax reduction|
|Born before 6 April 1936||£791.50|
A family affair?
By using the available personal allowances and gains exemptions, a couple and their two children could have income and gains of at least £81,360 tax-free, and income up to £165,800 before paying any higher rate tax. Through careful tax planning, we could help you and your family to benefit from more of your wealth.
Your tax planning objectives should include taking advantage of tax-free opportunities, keeping marginal tax rates as low as possible, and maintaining a spread between income and capital.
|Income tax and capital gains tax rates for 2013/14|
|Rate Band||Taxable Income||Earnings etc||Savings||Dividends|
|Basic||Up to £32,010||20%||10%/20%*||10%|
* There is a 10% starting rate for savings income up to the starting rate limit (£2,790) within the basic rate band. Where taxable non-savings income does not fully occupy the starting rate limit the remainder of the starting rate limit is available for savings income.
** Personal allowance is reduced by £1 for every £2 that adjusted net income exceeds £100,000. The effective marginal rate in this band is 60% (dividends 48.75%).
*** Depends on the level of income and gains.
The 45% (or additional) top income tax rate
The top rate of income tax, for those with taxable income in excess of £150,000, is 45% (37.5% for dividends). Contact us now for up-to-date advice on minimising the impact of the top tax rates.
A ‘60% tax rate’?
Personal allowances are scaled back if income exceeds £100,000, giving an effective tax rate on an £18,880 slice of income of 60%.
It may be possible to reduce your taxable income and retain your allowances, if approached with due consideration, eg. by making pension contributions.
Cap on reliefs
There is a ‘cap’ on certain otherwise unlimited tax reliefs (excluding charitable donations) of the greater of £50,000 and 25% of your income.
Planning can be hindered by the potential for tax charges to arise when assets are moved between members of the family. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to CGT and IHT.
However, special rules govern the transfer of assets between spouses. In many cases for both CGT and IHT there is no tax charge, but there are some exceptions – please contact us for further advice.
Gifts must be outright to be effective for tax, and must not comprise a right only to income. Careful timing and advance discussion with us are essential.
Case Study 1
David is a single person with a gross 2013/14 income of £45,000 (made up of £25,000 earnings, £5,000 of interest and grossed-up UK dividends of £15,000) and capital gains of £11,000 (assuming no other reliefs, etc). He would have a tax liability of £6,438.75 (2012/13 £6,559.12).
|Income and gains||25,000||5,000||15,000||11,000|
|Deduct: Personal allowance||– 9,440|
|Deduct: CGT exemption||–10,900|
|Total tax liability||£6,438.75|
Investing in your children’s future
A prominent financial challenge facing children today is the amount of debt they will have amassed by the time they leave university. With the advent of higher tuition fees, student debt is likely to increase significantly in the coming years, and the latest studies are suggestive of debts in the region of £60,000 for a student starting university in 2013.
For younger family members, the Child Trust Fund (CTF) created 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 the child’s working life. The CTF closed to new entrants at the beginning of 2011, to be replaced by the new Junior Individual Savings Account (JISA). Further details are provided in this guide.
All children have their own personal allowance, meaning that income up to £9,440 escapes tax this year, as long as it does not originate from parental gifts. If income from parental gifts exceeds £100 (gross), the parent is taxed on it unless the child has reached 18, or married. Consequently parental gifts should perhaps be invested to produce tax-free income, or accumulate income, or in a cash or stocks and shares JISA. The £100 limit applies per parent but not to gifts into CTFs, JISAs or National Savings Children’s Bonds.
Considering your grandchildren
If your child is grown up and financially secure, it may be worth ‘skipping’ a generation as income from capital gifted by grandparents or more remote relatives will usually be taxed as the child’s, as will income distributions from a trust funded by such capital.
Maintenance payments do not usually qualify for tax relief. Similarly, maintenance payments received under orders or agreements are not taxable. However, tax relief worth up to £304 this year is given on maintenance paid to a former spouse under court orders or enforceable agreements, if at least one of the former parties to the marriage was born before 6 April 1935.
The special CGT and IHT treatment for transfers between spouses applies throughout the tax year in which a separation occurs. For CGT, 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, which could result in substantial chargeable gains. For IHT, transfers remain exempt until the decree absolute.
Careful consideration as to the timing of such transfers is essential. We can provide advice and assistance in this matter.
Your contingency plan
Proper contingency planning can help to ensure that your spouse and/or children would be able to cope financially if you died or were incapacitated.
There are several initial steps you can take to ensure that your loved ones would be taken care of, if something were to happen to you. Taking out adequate insurance cover, perhaps with life assurance written into trust for your spouse or children to ensure quick access to funds, would be one sensible measure. However, it is also important to make a Will. We also strongly recommend that you:
- Make a living Will (also called ‘advance decisions’): so that your wishes are clear in the event that, for example, you were to be pronounced clinically dead following an accident
- Execute a lasting power of attorney: so that if you become incapacitated and unable to manage your affairs, whether as a result of an accident or illness, responsibility will pass to a trusted person of your choosing.
Remember to consider similar family protection measures for your spouse as well, in the event that you were both to be simultaneously killed or incapacitated.
It is also useful to make sure that you tell your spouse, your parents, and your business partners where your Will and any related documents are kept. It is your choice whether to discuss with them the contents of the documents, but if you are passing on responsibility for managing your affairs, it might be advisable to talk matters through with them in advance.
Do you have unclaimed assets?
There are billions of pounds worth of assets lying unclaimed in the UK. To see if you have any lost assets contact the Unclaimed Assets Register on 0844 481 8180.
To find out whether you have an unclaimed Premium Bond prize, call 0500 007 007 or visit www.nsandi.com.
Taxation of non-domiciliaries (non-doms) and others entitled to claim the remittance basis
The rules are complex and a full analysis is beyond the scope of this guide, so please talk to us if you are affected. But as a brief summary of the position for 2013/14:
- If your unremitted foreign income or gains exceed £2,000, you will have to decide whether to include them in your self assessment return for 2013/14, or not include them and report on a remittance basis and lose the income tax personal allowance and CGT annual exemption.
- If you are an adult caught by the ‘years of residence rule’ you will have to decide whether to include them in your self assessment return for 2013/14 and pay UK tax or pay the £30,000/£50,000 ‘Remittance Basis Charge’ (RBC). This decision is made when you complete your 2014 Tax Return, and the tax will be due as 2013/14 tax.
- Credit for the UK tax or RBC may be claimable against your liability elsewhere in the world, and possibly against the UK liability when the income or gains are finally remitted.
- The definition of a remittance goes beyond money you bring into the UK. For example, tax will be due on the remittance to the UK by certain close family members of income or gains gifted by you to them outside the UK, and on the import of assets bought outside the UK using untaxed income or gains (subject to limited exemptions).
Checklist: Financial protection strategies
|Lasting power of attorney|
|Keep papers in a safe place – and make sure other people know where they are!|
|Income, mortgage and loan protection insurance|
|Estate planning to minimise the tax due on your estate|
|Planning for the transfer of your business|
|Other points to think about:|
|Funeral arrangements and expenses|
|A tax-efficient gift strategy|
Follow-up – Contact us about…
- Making the most of tax-free opportunities
- Ensuring that tax rates are as low as possible
- Using savings, capital and other vehicles to give your children a better start in life
- Drafting a Will
- Insuring your life and obtaining disability and critical illness insurance
- Saving for income and investing for capital growth