Year End Tax Planning Guide
As each spouse is taxed separately, tax planning involves making best use of the personal allowance (PA); the starting and basic rate tax band; Savings Allowance (SA) and Dividend Allowance. The aim is to distribute income within the family to take maximum advantage of these. There is also the possibility of making gifts of assets to distribute income more evenly – but gifts must be outright and unconditional. Sometimes an alteration in timing can be critical, and it may be possible to even out the flow of income between one year and the next.
Change to rates and bands
In the tax year 2018/19, the PA is £11,850. Budget 2018 announced that this would rise to £12,500 in 2019/20, a year earlier than expected. The basic rate band is £34,500 for 2018/19, rising to £37,500 for 2019/20. With the PA, the threshold at which taxpayers start paying higher rate tax becomes £46,350 for 2018/19, and £50,000 for 2019/20.
Additional rate tax is payable on taxable income above £150,000 for all UK residents.
Other than for savings and dividend income (where the UK bands apply), higher rate income tax is payable at lower levels of income in Scotland than in the rest of the UK. Assuming a basic PA, the threshold at which Scottish taxpayers start paying higher rate tax is £43,430 in 2018/19 and 2019/20. Scotland also has a 19% starter rate of tax and a 21% intermediate rate.
The administration of tax is changing in Wales. From 6 April 2019, part of the income tax paid by Welsh taxpayers will be spent directly by the Welsh Government: it becomes the Welsh Government's responsibility to decide each year whether to vary the rates of income tax for Welsh taxpayers, or keep them the same as those paid by English and Northern Irish taxpayers. The Welsh Government has said it will not increase income tax rates for the duration of the current National Assembly, which is due to continue until May 2021.
In some circumstances, it may be possible to transfer allowances between spouses. Recipients of the blind person's allowance (£2,390 in 2018/19), who don't pay tax, or can't use all the allowance, can transfer this to a spouse.
Part of the PA can be transferred between spouses. Marriage allowance of £1,190 for 2018/19 can be transferred, but only where neither spouse pays tax at higher rate.
- Transferring just £1,000 of savings income from a higher rate (40%) tax-paying spouse, who has used their SA in full, to a basic rate spouse with no other savings income may save up to £400 a year.
Children: using allowances and rate bands
For tax purposes, children are treated independently. They have their own PA, and their own savings and basic rate tax band. They also have their own capital gains tax (CGT) annual exemption. In some cases, there can be a tax saving by transferring income-producing assets to a child. However, when shifting income from a parent to a child who is a minor, any income in excess of £100 will still be taxed on the parent. It is thus not always possible to use a child's PA by means of a parent transferring income-producing assets.
- There may be potential to divert income from grandparents or other relations, to take advantage of a child's PA.
If you have a family business, employing your teenage children may be an appropriate way to utilise PA and basic rate band. The arrangement should be formalised, with hours worked and rate of pay recorded.
Income from jointly-owned assets
Any income arising from assets jointly owned by spouses is usually assumed to be shared equally for tax purposes. This is the case even if an asset is owned in unequal shares – unless an election is made to split the income in proportion to ownership.
Dividend income from jointly-owned shares in 'close' companies (broadly speaking, companies owned by the directors or five or fewer people) is an exception. This is split according to actual ownership of the shares. This means that if, say, one spouse is entitled to 95% of the income from jointly-owned shares, they pay tax on 95% of the dividends from the shares.
If you work for yourself, consider employing your spouse or taking them into partnership. This can redistribute income tax efficiently, and can be just as relevant for a property investment business producing rental income as for a trade or profession.
Care is always important in this area. HMRC is likely to scrutinise payments to family members to check that they are commercially justifiable. It is also important that wages are actually paid, not just bookkeeping entries.
Significant tax consequences can arise on separation and divorce. The availability of tax allowances, and transfers of assets between spouses are key areas for consideration.
Transferring assets between spouses can have CGT consequences unless the timing of transfers is carefully planned. This however, is not always possible in the circumstances. Where an asset is transferred between spouses who are living together, it is deemed to be transferred at a price giving rise to neither a gain nor a loss. This applies up to the end of the tax year in which marital separation occurs. Where a transfer takes place after the end of the tax year of separation, transactions are treated as taking place at market value. This potentially creates capital gains which may not qualify for deferral relief.
- If practical, couples separating during the tax year should consider transferring assets before 5 April.