Taxation of the family
Individuals are subject to a system of independent taxation, meaning that spouses and civil partners are taxed separately. This arrangement can create valuable tax planning opportunities. Additionally, the tax implications for any children are significant, and the breakdown of a marriage or civil partnership can substantially affect tax positions. At AHACCOUNTANTS, we can help you navigate these issues and develop a tax-efficient strategy based on your family’s unique circumstances.
It is essential to seek professional advice on issues pertinent to your personal situation.
Setting the Scene
Married Couples and Civil Partners
Independent taxation ensures that spouses and civil partners are taxed separately on their income and capital gains. Consequently, each has their own allowances, savings, and basic rate tax bands for income tax, as well as their annual exemptions for capital gains tax, making them responsible for their own tax affairs.
Children
Children are considered independent for tax purposes and are entitled to their own personal allowance and basic rate tax band before being subject to higher tax rates. Strategically generating income or capital gains in a child’s name may lead to tax savings.
Marriage and Civil Partnership Breakdown
Separation, divorce, and dissolution can have significant tax implications, particularly concerning:
- Available tax allowances
- Transfers of assets between spouses
Tax Planning for Married Couples and Civil Partners
Income Tax Allowances and Tax Bands
Everyone is entitled to a basic personal allowance, which cannot be transferred between spouses or civil partners, except in specific situations.
Marriage Allowance (MA)
Married couples and civil partners may qualify for the Marriage Allowance (MA), allowing one partner to transfer a portion of their personal allowance to the other, provided neither partner pays tax at the higher or additional rate. Currently, eligible couples can transfer £1,260 of their personal allowance, worth approximately £250 if one partner does not fully utilize their allowance. To apply, visit www.gov.uk/marriage-allowance.
If either spouse or civil partner was born before 6 April 1935, they may qualify for the Married Couple’s Allowance (MCA). The MCA is based on the income of the higher earner, and couples cannot claim both the MA and MCA, with the MCA typically providing higher relief.
Joint Ownership of Assets
Married couples and civil partners should strategically arrange their ownership of income-producing assets to optimize personal allowance utilization and minimize higher rate tax liabilities. Generally, income from jointly owned assets is treated as shared equally for tax purposes, unless an election is made to distribute income according to ownership proportions.
For dividends from shares in ‘close’ companies, spouses are taxed based on their actual ownership percentages. We can advise on the best strategies for managing jointly owned assets to minimize tax liabilities.
Capital Gains Tax (CGT)
Each spouse’s CGT liability is calculated based on their individual asset disposals, with each entitled to an annual exemption of £3,000 for 2024/25 (£6,000 for 2023/24). Tax savings may be achieved by maximizing the use of available capital losses and annual exemptions, often by transferring assets between spouses before a sale. Advance planning is crucial, and potential income tax effects of asset transfers should not be overlooked.
Inheritance Tax (IHT)
IHT applies to an estate upon death, with specific lifetime gifts treated as chargeable transfers. The IHT rate is 40% on death and 20% on lifetime chargeable transfers, with the first £325,000 exempt (the nil rate band).
Transfers between spouses are generally exempt from IHT, and any unused nil rate band from the first death can be transferred to the surviving spouse’s estate.
IHT Residence Nil Rate Band
An additional nil rate band is available when a main residence passes to direct descendants, amounting to £175,000 for 2024/25 and frozen until 2028. Many married couples can effectively double this relief through careful planning.
Taxpayers need to consider three nil rate bands: the standard nil rate band, the transferable nil rate band, and the residence nil rate band. It’s vital for individuals to revisit their wills to ensure efficient utilization of these reliefs.
Gifts
Certain gifts are exempt from IHT, including those for family maintenance, gifts for marriage (up to £5,000 from parents), and small gifts not exceeding £250 per recipient per tax year. Regular gifts made from income that do not reduce the donor’s standard of living may also be exempt.
Children
Use of Allowances and Lower Rate Tax Bands
Transferring income-producing assets to children can lead to tax savings, as children can utilize their personal allowances. However, if a child’s income exceeds £100, the income is taxed on the parent. Using a ‘bare trust’ can allow children to benefit from CGT annual exemptions.
Universal Credit
Universal Credit may be available to some families. To check eligibility, visit www.gov.uk/universal-credit.
Junior Individual Savings Accounts (Junior ISA)
Junior ISAs are available for UK resident children under 18 who do not have a Child Trust Fund account. They offer tax advantages and can be either cash or stocks and shares, with an annual subscription limit of £9,000 for 2024/25.
High Income Child Benefit Charge
A tax charge applies to taxpayers with adjusted net income over £60,000 who receive Child Benefit. The charge is 1% of the full Child Benefit for every £200 of income over £60,000, with the full amount payable for incomes above £80,000. Claimants can opt out of receiving Child Benefit to avoid this charge.
Marriage and Civil Partnership Breakdown
Maintenance Payments
Generally, no tax relief is available on maintenance payments following a separation or divorce.
Asset Transfers
Careful planning is crucial for asset transfers during a marriage or civil partnership breakdown to avoid adverse CGT consequences. Transfers between spouses living together are deemed tax-neutral for three years after separation, and the IHT spousal exemption applies to transfers before a decree absolute.
For tailored advice on family taxation and effective planning strategies, please contact AHACCOUNTANTS today.