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Strategies for you and your family

No matter what your age, personal or financial status, you will have dreams, and expectations. The impact of the recession necessitates a review in order to evaluate what realistic view you take of your planning. We can advise and help you plan how to make your goals a reality.

Here's where we can advise
  • Understanding your tax allowances and rates
  • Making the most of tax free opportunities
  • Keeping tax rates as low as possible across the family
  • Using savings, capital and the Child Trust Fund to give your children a better start in life
  • Making a Will
  • Making a living will and giving someone you trust an enduring power of attorney over your affairs
  • Insuring your life and obtaining disability and critical illness insurance
  • Saving for income and investing for capital growth

Realising your goals

No matter what your age, personal or financial status, you will have dreams, and expectations. The impact of the recession necessitates a review in order to evaluate what realistic view you take of your planning. We can advise and help you plan how to make your goals a reality. It may seem like a formidable task, when you consider that you may need to plan for the costs of raising your children, saving for their education and maybe even providing some assistance for the purchase of their first home. Your planning may also need to take into account:

  • Helping to care for and support ageing parents,
  • Achieving the standard of living you want for your household, and
  • Funding your retirement

But, as you will find in this guide, there are plans you can make and steps you can take which will start you on the road to realising your goals.

Basic principles

Let's start by looking at some of the worthwhile strategies you could apply within the family.

Each member of your family is taxed as an individual - entitled to his or her own allowances and exemptions.

For 2010/11

Income Earnings, etc Savings UK Dividends
First £6,475 Tax-free Tax-free 10%
Next £2,440 20% 10%/20%* 10%
Next £34,960 20% 20% 10%
Next £112,600 40% 40% 32.50%
Excess 50% 50% 42.50%
Capital gains
First £10,100 Tax-Free
Remainder 18%

* The first £2,440 of savings income is taxed at 10% provided taxable non-savings income does not exceed £2,440.

Allowances and rate bands are allocated first to your earned income (which includes pensions), then to your savings income, then to any UK dividend income. If your non-savings income exceeds £2,440, the savings rate of 10% does not apply.

Case study

Paul is a single person with a gross income of £45,500 (made up of £30,000 earnings, £5,000 of interest and grossed-up UK dividends of £10,000) and capital gains of £10,500 (assuming no other reliefs, etc) would have a tax liability of £7,030.13 as shown below.

  Earnings
£
Interest
£
UK Divs
£
Gains
£
Income 30,000 5,000 10,000 10,500
P. A. 6,475      
CGT exempt       10,100
Taxable 23,525 5,000 10,000 400
Tax at 20% on 23,525 5,000    
10% on     8,875  
32.5% on     1,125  
18%       400
Total Tax Liability
£7,030.13 £4,705.00 £1,000.00 £1,253.13 £72.00

For those 65 and over

The personal allowance for 2010/11 for those aged 65 to 74 at 5 April 2011 is £9,490, and for those aged 75 or over it increases to £9,640. Both higher allowances are scaled back if income exceeds £22,900, but in any event the minimum personal allowance in £6,475.

Married couple's allowance at 10% is available to married taxpayers and those in a civil partnership when the elder partner or spouse was born before 6 April 1935. The married couple's allowance may be scaled back if the husband's income (or, for marriages and civil partnerships on or after 5 December 2005, if the income of the spouse or partner with the most income) exceeds £22,900. The allowance is subject to a minimum value of £267.

Age at 5 April 2011 Personal allowance Maximum married
couple's allowance worth
65 - 74 £9,490  
75 £9,640  
Elder spouse    
75 or over   £696.50
Minimum   £267.00

Basic tax planning for the family

With careful planning, a couple with two children could have income and gains of at least £66,300 tax free, and up to £215,900 before paying any higher rate tax. 

Planning objectives include:

  • Making the most of your tax free allowances
  • Keeping your marginal tax rates as low as possible
  • Maintaining a spread between your income and capital

Create opportunities to save tax

The implementation of decisions can be hindered by the potential for tax charges to arise when assets are moved between family members. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to capital gains tax (CGT) and inheritance tax (IHT).

However, there is normally no tax charge on transfers of assets between spouses living together*, or between separated spouses in the tax year in which separation occurs. We can help you to create opportunities to reduce your marginal tax rates by careful identification of appropriate strategies.

Situation Possible strategy Possible result
Income from assets taxed at 40% Transfer to spouse if he/she pays tax at lower rates
Transfer into joint names
Tax @ 40% reduced to 20% or less
Half of income taxed at 20% or less
Proposed sale will give sizeable capital gain Transfer to spouse if he/she can use his/her annual CGT exemption or
spouse has unused CGT losses
Transfer into joint names
Defer sale of 50% until after the end of the tax year
Further £10,100 (maximum) of gain tax free
Cover part or all of gain with losses
Double exemptions and deferring some tax by 12 months
One spouse rich in assets - wish to make gifts within CGT and IHT limits Transfer to the other spouse, who can then make gifts in parallel Double exemptions

Gifts must be outright to be effective for tax, and must not comprise a right only to income.

* Transfers on or within seven years of death to a spouse domiciled outside the UK are exempt only to the extent of £55,000.

A debt free start for your children

New Student fees for 2011

One of the biggest financial problems facing children today is the amount of debt they will have incurred by the time they leave university. Surveys suggest that the average student leaving university in 2010/11 will have debts of between £10,000 and £25,000. However, for those entering university now, it is very likely that on a four year course their debt when they graduate will exceed £30,000, due to the impact of tuition fees.

For younger children, the Child Trust Fund may create the opportunity for parents, grandparents and other family members to build - with Government help - a fund to help offset university expenses and minimise debt at the start of your child's working life.

With an initial payment worth £250 (£500 for low income families) from the Government plus a second of £250/£500 at age seven and further state payments at age 11, parents and others can add up to £1,200 a year in total to the tax-free fund which can be available any time after the child reaches 18.

Older children will not receive the Government help, but they have their own personal allowances meaning that income up to £6,475 escapes tax this year, provided the capital does not originate from parental gifts. If income arising on parental gifts exceeds £100, the parent is taxed on it unless the child has reached 18, or is married. Thus parental gifts in excess of, roughly, £3,000 in total should perhaps be invested in something which produces tax-free income, or which accumulate income, or in a Cash ISA. The £100 limit on income does not apply to income on gifts into the Child Trust Fund or National Savings Children's Bonus Bond.

Generation skipping

Income from capital gifted by grandparents or other relatives will be taxed as the child’s, as will income distributions from a trust funded by such capital.

Marriage breakdown

Tax relief worth up to £267 this year is given on maintenance paid to a former spouse under orders or enforceable agreements, so long as at least one of the former parties to the marriage was born before 6 April 1935. Otherwise, maintenance payments do not qualify for tax relief. Maintenance payments received under orders or agreements are not taxable.

The special CGT/IHT treatment for transfers between spouses applies throughout the tax year in which separation occurs. 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 until the date of decree absolute, after which former spouses are no longer regarded as connected.

There are, therefore, arguments for and against making transfers as quickly as possible after separation, or for delaying them until after the decree absolute. Contact us if you are not sure which is the best course to take.

In particular, the potential tax burden on the disposal of the former marital home as a result of separation and divorce can be significant, and may be something about which you need specific advice.

Financial protection for your family

How would your spouse and children manage if you died or were incapacitated tomorrow?

Beyond taking the obvious step of ensuring you have adequate insurance cover, with life assurance written into trust for your spouse or children to ensure quick access to funds, you need to make a Will. We would also strongly recommend that you:

  • Make a living Will - so you can make clear your wishes in the event that, for example, you are pronounced clinically dead following an accident, and
  • Execute - so that if, whether as a result of an accident or illness, you become incapable of managing your affairs, you can be reassured that responsibility will pass to someone you choose and trust.

Of course all this also applies for your spouse, and to those who are in civil partnerships. You should also consider the possibility that both parents may be simultaneously killed or incapacitated.

On a practical note, tell your spouse, your parents, and your business partners where your Will and any related documents are kept - it is still up to you whether or not you tell them what the documents contain, but if you are passing responsibility for managing your affairs on to others, it would be advisable to talk matters through with them now.

A shot in the dark?

It is estimated that over £15 billion is 'lost' including £5 billion in dormant accounts, £3 billion in pensions, £3 billion in shares and dividends and £3 billion in national savings. To see if you have a lost policy or investment you may contact the Unclaimed Assets Register on 0870 241 1713. A fee applies for this service at a current rate of £25. And call 0845 964 5000 or log on to www.nsandi.com to see if you have an unclaimed premium bond prize.