Tax Planning prior to 5th April 2007 - Family matters
March 2007
Spreading assets and income around the family can reduce the overall tax bill. Please note that care should always be taken in adopting any tax strategy that involves other family members - advice should always be taken prior to any action being taken. Possible short-term advantages and any long-term disadvantages should be considered together.
Some simple ways to achieve this are set out below:
Transfer of Income Producing Assets
If one spouse or partner is a basic rate taxpayer while the other is a higher rate taxpayer, it may make good sense to ensure that income-producing assets are in the name of the person paying tax at lower rates.
Investing for Capital Growth rather than income.
If parents gift capital to their children under 18 and as a result the child receives income of more than £100 a year by investing the gifted capital, the parents are taxed on that income until the child either becomes 18 or marries before reaching that age. (Income from child trust funds (CTFs) and National Savings Childrens Bonus Bonds are not treated in this way.) A possible way to avoid this income tax charge on the parents is to ensure that the capital is invested in funds that generate capital growth rather than income - though note that gains may be assessed on the parent, subject to the usual annual exemption if available. When transferring assets to children, the capital gains tax (CGT) and inheritance tax (IHT) implications must also be considered. Importantly, the ownership of an asset must genuinely be transferred for a gift to be tax-effective.
ISA investments for 16/17 year olds.
To encourage younger savers, 16 and 17 year olds can invest up to £3,000 in a cash deposit within an ISA. However, if parents give their children funds to invest in the ISA, and the investment income arising on all gifts from parents to any child exceeds £100 in the year, the parents will again be taxed as if the income belonged to them. Grandparents or other relatives and friends may be able to provide cash for such an ISA investment and thus the income can then be received tax-free. However since the 6 April 2006 the Revenue are attempting to tax the benefit of such gifts and until the dust settles the outcome of gifts from grandparents and others is less certain.
Child Trust Funds (CFC's).
Child trust funds (CTFs) - Income and gains within a CTF are exempt from income tax and CGT. Parents and others (including the child) can contribute up to £1,200 in total each tax year. Now would be a good time to think about topping up a CTF to use this year's allowance. CTFs are intended to provide an accumulation of money and assets for children when they reach age 18, perhaps providing a lump sum towards further education. All UK-resident children born after 31 August 2002 are eligible for this fund. The Government makes an initial £250 contribution (more to those on low income) to a CTF following a claim to child benefit and a further contribution when the child reaches age seven.
