Personal and family financial strategies
Your long-term goals
Every client is different and will have unique financial needs and goals. You might simply want to maximise your wealth so that you can enjoy more of your hard-earned money now and in retirement. You might need to pay for your children's education, or to help support ageing parents. Or perhaps all of the above apply. As your accountants, we can suggest practical ways to help make these objectives become reality.
Exemptions and allowances
Each individual within your family is taxed separately, and is entitled to his or her own allowances and exemptions. The basic personal allowance for 2016/17 is £11,000, while the capital gains tax annual allowance for 2016/17 is £11,100.
A series of rate bands and allowances are assigned first to your earned income (this may include income from wages, self-employment, property income and pensions), then to your savings income, and finally to any UK dividend income.
Planning within the family
By using the available personal allowances and gains exemptions, a couple and their two children could have income and gains of at least £88,400 tax-free, and income up to £172,000 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 rates
For 2016/17, Scottish taxpayers are effectively subject to the same income tax rates as the rest of the UK.
*There is a 0% starting rate for savings income up to the starting rate limit (£5,000) 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. For 2016/17, £1,000 of savings income for basic rate taxpayers (£500 for higher rate) may be tax-free.
**For 2016/17, the first £5,000 of dividends are tax-free.
*Depends on the level of income and gains. The rates are increased to 18% and 28% for carried interest and gains on residential property.
Transferable Tax Allowance (Marriage Allowance)
Some married couples and civil partners are eligible for a Transferable Tax Allowance, enabling spouses to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner (£1,100 for the 2016/17 tax year). For those couples where one person does not use all of their personal allowance the benefit will be up to £220 (20% of £1,100).
Personal Savings Allowance
From 6 April 2016 a new Personal Savings Allowance (PSA) applies to income such as bank and building society interest. The allowance applies for up to £1,000 of a basic rate taxpayer's savings income, and up to £500 of a higher rate taxpayer's savings income each year. The PSA will provide basic and higher rate taxpayers with a tax saving of up to £200 each year. The allowance will not be available for additional rate taxpayers and will be in addition to the tax advantages currently available to savers from ISAs.
Dividend Tax Allowance
From 2016/17, a new Dividend Tax Allowance (DTA) of £5,000 per annum has been introduced. The new allowance does not change the amount of income that is brought into the income tax computation. Instead it charges £5,000 of the dividend income at 0% tax - the dividend nil rate. The DTA will not reduce total income for tax purposes, and dividends within the allowance will still count towards the appropriate basic or higher rate bands.
Kaya is a single person with a gross 2016/17 income of £56,000 (made up of £26,000 earnings, £5,000 of interest and UK dividends of £25,000) and capital gains of £11,200 (assuming no other reliefs, etc). She would have a tax liability of £8,670.
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. In addition, 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.
The 45% and 60% effective tax rates
The top rate of income tax, for those with taxable income in excess of £150,000, is 45% (38.1% for dividends). Personal allowances are scaled back if 'adjusted net income' exceeds £100,000. The personal allowance is reduced by £1 for every £2 of income in excess of that limit. This means that an individual with total taxable income of £122,000 or more will not be entitled to any personal allowance. This gives an effective tax rate on this 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 or Gift Aid donations. Contact us now for advice on minimising the impact of the top tax rates.
Child Benefit: another 'hidden' tax rate
A charge arises on a taxpayer who has adjusted net income over £50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £50,000 the charge applies to the partner with the higher income.
The income tax charge applies at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid. Claimants may elect not to receive Child Benefit if they or their partner do not wish to pay the charge. Equalising income can help to reduce the charge for some families.
Nathan and Debbie have two children and receive £1,789 Child Benefit for 2015/16. Debbie has little income. Nathan's income is over £60,000 for the 2015/16 tax year. So the tax charge on Nathan is £1,789. For 2016/17 the Child Benefit for two children also amounts to £1,789 per annum. Nathan expects his adjusted net income to be £55,000. On this basis the tax charge will be £895. This is calculated as £1,789 x 50% (£55,000 - £50,000 = £5,000/£100 x 1%).
If Nathan can reduce his income by a further £5,000 no charge would arise. This could be achieved by transferring investments to Debbie or by making additional pension or Gift Aid payments.
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. This cap applies to relief for trading losses and certain types of qualifying interest.
Giving your children a head start in life
Funding a university course and saving up a deposit for a first home are expensive prospects, so the sooner you start planning, the better. All children have their own personal allowance, so income up to £11,000 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. Parental gifts should perhaps be invested to produce tax-free income, or in a Cash or Stocks and Shares Junior Individual Savings Account (JISA) to help build a fund to help offset university expenses and minimise debt at the start of the child's working life. The £100 limit does not apply to gifts into JISAs or National Savings Children's Bonds.
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. 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. The timing of such transfers is crucial. We can assist in this area.
Planning for the worst
Contingency planning could help to ensure that your family are financially secure if you died or were incapacitated. A first step might be to take out adequate insurance cover, perhaps with life assurance written into trust for your spouse or children to ensure quick access to funds. It is also important to make a Will. We also strongly recommend that you and your spouse:
Make a living Will (also called 'advance decisions'): so that your wishes are clear with regard to medical treatment in the event that, for example, you were seriously injured 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 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 your affairs in detail, but if you are passing on responsibility for managing your affairs, it might be advisable to talk matters through with them.
Billions of pounds worth of assets lie unclaimed in the UK. To see if you have any lost assets contact the Unclaimed Assets Register on 0844 481 8180 or visit www.uar.co.uk. Please note that a charge applies for this service. To find out whether you have an unclaimed Premium Bond prize, call 0500 007 007 or visit www.nsandi.com.
A UK resident and domiciled individual is taxed on worldwide income and gains. Non-UK domiciles who are UK resident are currently able to claim the remittance basis of taxation in respect of foreign income and gains and are only taxed if foreign income and gains are brought into the UK. The non-UK domicile is also favourably treated for IHT as they only pay IHT in respect of UK assets as opposed to their worldwide assets.
However, the Government intends to abolish non-UK domicile status for certain long term residents from April 2017. This will only apply where an individual has been resident for at least 15 out of the last 20 tax years. Such individuals will be treated as deemed UK domiciled for all tax purposes. In addition, those who had a domicile in the UK at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country.
Your next steps: contact us to discuss...
- Making the most of allowances and reliefs
- Ensuring that your tax liability is kept to a minimum within the law
- Using savings, capital and other vehicles to give your children a better start in life
- Writing a Will
- Life insurance and obtaining disability and critical illness insurance
- Tax-efficient savings and investments