AS we approach the end of another tax year – with significant tax change already in place and due to come in – it is important to use the remaining time before the April 5 deadline to review one’s affairs to ensure that the maximum benefits are obtained of available allowances and reliefs.
In doing so, it is worth looking not just at husband and wife but also parents and children.
Both husband and wife have the benefit of the Personal Allowance and the basic rate tax band.
Transfers of assets between them are free of all taxes. It may be beneficial to review the assets of each spouse to see if transfers can be made from one to the other to ensure Personal Allowances are not wasted and basic rate tax bands are utilised as far as possible whilst at the same time mitigating the extent of any higher rate tax liabilities on the transferring spouse.
Basic rate taxpayers can save 20% tax on income earned on assets transferred to a spouse who has not used their Personal Allowance.
Those with gross income in excess of £42,475 can save tax at 40% taxpayer and for very high earners, who begin to lose their Personal Allowance when income exceeds £100,000, the saving can be as high as 60% and those over £150,000 could save 50%.
From April 6, 2013, the highest rate of tax is to be reduced from 50% to 45% (42.5% to 37.5% for dividend income) and for those able to plan the timing of their income, tax-savings could be obtained by organising savings accounts to credit accrued interest on or after April 6, 2013, to ensure this income is taxed at the lower rate in the 2013/14 tax year.
Similarly, deferring the award of bonuses or dividends from your company until into the new tax year or delaying the encashment of investment bonds until after April 5, 2013, could secure tax benefits.
Charitable Gift Aid donations should also be made by the spouse who is the highest rate taxpayer as they are able to obtain the optimum relief for these payments, without affecting the tax position of the charity.
Remember to use up each spouses’ ISA allowance, given that the maximum subscription limit has increased to £11,280 (£5,640 for cash ISAs and £5,640 for stocks and share ISAs). Don’t forget that children under 16 may be able to have their own junior ISA to shelter further capital from tax.
Indeed, reviewing married couples’ affairs is now even more significant from January 2013 for those with children who face a loss of their Child Benefit where one spouse has income above the £50,000 threshold.
Children under 18 also have their own Personal Allowances and tax bands but income from capital gifted by a parent is only taxable on a child if it does not exceed £100 gross per annum. Otherwise it is taxable on the parent. For children over 18, income will always be taxed on them.
Gifts of up to £3,000 per donor (plus £3,000 for the previous year if unused) can be made completely free of inheritance tax.
Larger gifts can be made tax-free and without affecting future tax liabilities provided the donor survives 7 years. So if grandparents wish to help with increased educational costs it may well be appropriate for them to gift the money directly to the grandchildren rather than their parents so that any income is assessable on the grandchildren and would therefore be tax free up to the annual Personal Allowance.
Potential tax savings may be possible but due consideration should always be given to any commercial or other risks involved with such transactions.