Year End Tax Planning Series – Tax Planning and Family Impact

In the second blog of our year-end tax planning series, we wanted to shed some light on how you can effectively plan for taxes whilst understanding family impact. Although some people may believe that factors such as child benefits are classed separately to income, there are links to consider in order to correctly manage personal taxes.

This article will explore the bandings, allowances, and regulations that impact everyone earning money across the UK. The Hysons team are experienced in managing these factors and remaining up to date with the latest rules highlighted in the information below.

Make Full Use of Bands and Allowances

The incomes of married couples and civil partners are taxed separately. Each spouse or partner has their own personal allowance. In addition, a married couple’s allowance is available if one party was born before 6 April 1935. There is also what is called the ‘marriage allowance’, a transferable allowance that potentially makes £1,260 of the personal allowance of one party available to the other in certain circumstances. The donor’s income must normally be below the personal allowance for this to be beneficial.

Where each party is in a different tax band, making sure that income is distributed appropriately is key. Optimally, the personal allowance of the lower income spouse should be used in full, and full advantage taken of access to lower tax bands. It may be beneficial to transfer income-producing assets, such as property, stocks and shares, or even bank accounts to do this. It is always important to make sure that any transfer is an outright gift, and that the donor no longer exerts control over, or derives any benefit from it. Evidence of such transfer is also required. Please do talk to us prior to any action, to make sure that arrangements are effective and do not inadvertently fall the wrong side of any anti-avoidance legislation.

Children are treated independently for tax purposes. They have their own personal allowance, annual capital gains tax (CGT) exemption and their own basic rate tax band and savings band.

Tip: who should help?

From a tax point of view, it is usually more efficient for grandparents, rather than parents, to provide funds for investment for under-age children.

Involve Family in the Business

For family companies and unincorporated businesses alike, involving family members and remunerating them appropriately is usually very beneficial. It can be a good way to multiply the opportunities to extract profits before hitting higher rates of tax, or where a spouse or child is unlikely to use their personal allowance, for example. But involvement must be a practical and commercial reality, and you must be able to evidence that family members genuinely work in the business. Remuneration must be incurred wholly and exclusively for the purpose of the trade, and could be challenged if considered excessive by HMRC.

Tip: pension planning in family companies

Pension contributions remain a highly efficient way for director-shareholders to extract profits. Pension contributions are deductible expenses for corporation tax purposes, so long as they are wholly and exclusively for the purposes of the trade, and where a spouse is employed by the company, the company can also make reasonable contributions on their behalf. So long as the remuneration package is justifiable, the company should be able to claim tax relief for these.

Note New CGT Rules for Separating Couples

Transfers of assets between spouses can usually be made on a no gain/no loss basis for CGT purposes. But where spouses are in the process of separating, the rules are different. Until recently, the window in which such transfers could be made lasted only until the end of the tax year of separation. After that, transfers were treated as normal disposals for CGT purposes.

This has changed, so that for transfers on or after 6 April 2023, there are now up to three years after the tax year in which spouses cease to live together to make no gain/no loss transfers; and unlimited time if the assets are the subject of a formal divorce agreement. There are also special rules covering the position where someone has a financial interest in the former family home after separation, that apply when the home is sold.

Watch for Child Benefit Charge

The High Income Child Benefit Charge (HICBC) is still something many people are unaware of. It applies where one of a couple gets Child Benefit, and either one or both partners has adjusted net income in excess of £50,000. Partner for these purposes includes someone you live with as if you were married, as well as spouse or civil partner. If both parties are over the income threshold, the charge is the responsibility of the higher earner.

The charge 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, Child Benefit is withdrawn in full.

The government has said it intends to change the way that HICBC is administered and collected, so that those liable to pay can do so through their PAYE tax code. At present, however, taxpayers need to register for self assessment, and it’s the taxpayer who is expected to be proactive, and notify HMRC of their liability to pay the charge. There is an obligation to notify once adjusted net income is more than £50,000. In some cases, HMRC may make contact or send a nudge letter if it thinks someone is due to pay, but this does not happen automatically.

Understanding the Family Impact on Tax Planning With Hysons

From our experience, misunderstanding tax obligations concerning family impacts is one of the main mistakes people make. With the rules constantly changing and every family having a unique dynamic, it’s best to take the time to understand how your tax is impacted. To learn more, contact our team today.

Keep your eyes peeled for our next blog in this series, as we are still discussing family planning in terms of profit extraction from businesses.