Introduction »

Family matters

Married couples

The phrase ‘spouse’ whenever used in this guide includes a registered civil partner.

Spouses are taxed as independent persons, each of whom is responsible for their own tax affairs. In principle all individuals are entitled to a basic personal allowance before any income tax whatsoever is paid. However, some individuals on high incomes may receive a reduced or even no personal allowance. This is explained further below.

The basic 2011/12 personal allowance is £7,475. The tax bands and rates shown opposite are applied to each spouse separately, so that each may have taxable income up to £42,475 before they start to pay higher rate tax. There is no aggregation of income, no sharing of the tax bands and the basic personal allowance may not be transferred from one spouse to the other.

Tax rates

For 2011/12 the main tax rates remain unchanged at 20% basic rate tax, 40% higher rate tax and 50% additional rate tax.

A 10% rate band continues to be available for savings income in circumstances where an individual has taxable earned income of less than £2,560. The tax rates applicable to dividends remain the same for basic rate, higher rate and additional rate taxpayers.

Losing the personal allowance

Where an individual’s total 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 £114,950 or more will not be entitled to any personal allowance.

Higher allowances for those aged over 65

The basic personal allowance increases to £9,940 where the taxpayer is aged 65 or over on the last day of the tax year in question and £10,090 where the age on that day is 75 or over. This more generous allowance is reduced by £1 for every £2 that the taxpayer’s income exceeds £24,000.

It cannot be reduced below the basic allowance of £7,475 unless the taxpayer’s income exceeds £100,000.

Married couple’s allowance

In 2011/12 a married couple’s allowance is only available to those couples where at least one spouse is 77 or over by the last day of the tax year. It is normally claimed by the husband, except for marriages on or after 5 December 2005, where it is claimed by the higher income spouse. This allowance can be worth nearly £730 per year to a couple but its detailed application is complex. It is worth noting, however, that this allowance can be transferred to the wife or shared between the spouses if they so choose.

Minimising the tax bill

It follows from the basic rules set out above that tax is minimised if spouses equalise, as far as possible, their income so that all personal allowances are fully utilised and higher/additional rates of tax are minimised.

Jointly owned assets

Married couples will often own assets in some form of joint ownership. If they do not, then it may be advantageous for tax purposes for transfers to be made to ensure joint ownership.

This can have benefits for income tax, capital gains tax and even inheritance tax.

Where assets are owned in joint names any income is deemed to be shared equally between the spouses. If the actual ownership shares are unequal, income is still deemed to be split equally unless an election is made to split the income in the same proportion as the ownership of the asset.

This does not apply to shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned.

Capital gains tax

Independent taxation also applies to capital gains tax. Each spouse is entitled to take advantage of the annual exemption of £10,600 before any capital gains tax has to be paid.

This is advantageous where assets are held jointly and then sold as each spouse can use their annual exemption to save tax.

The transfer of assets between spouses is neutral for capital gains tax. This is sometimes done shortly before assets are sold to minimise tax. Advice should be sought before undertaking such transactions to ensure that all tax aspects have been considered.

Capital gains tax is payable on the amount of capital gains above the annual exemption at either 18% or 28%. Further detail on the operation of this tax is included in the disposals and capital gains tax section of this guide.

Separation

The breakdown of a marriage will often involve the transfer of assets between spouses. The marriage continues until the divorce is legally finalised, but, for transfers of assets to be entirely free of a charge to capital gains tax, the transfer must be made before the end of the tax year in which the separation takes place.

Separation is deemed to happen when the couple cease to live together as man and wife - quite different to the date the divorce is final which is often much later.

Conversely, for inheritance tax, transfers that take place before the divorce is final will continue to be exempt.

There is usually neither tax relief on maintenance payments made by one former spouse to another nor on any payments required by the Child Support Agency.

Children

It is often assumed that children are not taxpayers until they achieve some particular age.

In fact HMRC will tax a child just as readily as anyone else if the child has sufficient income to make them liable.

Transferring income to children

Children have their own personal allowances and tax bands. Where their only income is, at best, a few pounds from a paper round or a Saturday job, there may be some scope for transferring income producing assets to the children to use up their personal allowance.

However, such assets should not be provided by a parent, otherwise the income remains taxable on the parent, unless it does not exceed £100 each tax year.

Children and capital gains

Children also have their own annual exemption for capital gains tax so that assets transferred to them which have a bias towards capital growth rather than income may prove to be more advantageous.

Repayment claims

Where children have significant sources of income from which tax has been deducted, such as bank interest or trust income, they will almost certainly be entitled to a repayment. In such cases a repayment claim should be made.

Child Trust Funds (CTFs)

These accounts were introduced to encourage tax efficient savings, with the government’s help, to build a savings fund which the child can access once they reach 18.

The availability of new CTFs ceased from January 2011 as did government contributions to the accounts. Existing CTFs will continue to benefit from tax free investment growth. No withdrawals are possible until the child reaches age 18. However, the child’s friends and family will continue to be able to contribute up to an overall total of £1,200 a year and it will still be possible to move it to another provider.

Junior Individual Savings Account (ISA)

A new Junior ISA is to be introduced which will be available for UK resident children under the age of 18 who do not have a CTF account. Junior ISAs will be tax advantaged and will have many features in common with existing ISAs.

They will be available as cash or stocks and share based products.

The government expects that Junior ISAs will be available from autumn 2011.

Tax Credits

The Child Tax Credit is means tested and potentially available to families who have responsibility for one or more children. The basic family element is £545 per annum. The amount is tax free and is available where combined annual income is less than £41,330. Working Tax Credit is available to workers on lower incomes with or without children. The credits may include a claim for 70% of childcare costs up to a maximum payment of £122.50 (£175 x 70%) per week for one child and £210 (£300 x 70%) per week for two or more children.

There are several elements to both types of credit and claims can be complicated. So please talk to us about how to get further information.

Civil partnerships

All the special rules for married couples, both those dealt with in this section and those covered in other sections of this guide apply equally to same-sex couples who have entered into a registered civil partnership.

What about unmarried partners?

It still pays to equalise income as much as possible, as income tax will be minimised. However, transfers of assets may be liable to capital gains tax and, if substantial, could also lead to an inheritance tax liability. It is vital for unmarried couples to each make a Will if they wish to benefit from each other’s estate at death.

A word of warning

Transferring assets or interests in a business between husband and wife may attract the interest of HMRC especially where it is obvious that it has been done primarily for tax saving purposes. Transfer of ownership of an asset must be real and complete, with no right of return and no right to the income on the asset given up.

If a non-working spouse is given shares in an otherwise one-person, private company, HMRC may regard this as a sham and seek to tax the working spouse on all of the dividends under what is known as the ‘settlements legislation’. So you may want to consider obtaining advice before entering into this type of arrangement.

Introduction »