Married couples
Married couples are subject to a system of independent taxation which means that husbands and wives are taxed separately on their income and capital gains. The effect is that both have their own allowances, tax bands for income and capital gains tax (CGT) purposes and are responsible for their own tax affairs.
| 2003/04 Income Tax Rates | |
| £ | % |
| 0 - 1,960 | 10 |
| 1,961 - 30,500 | 22* |
| Over 30,500 | 40** |
| *10% on dividends 20% on other savings income **32.5% on dividends |
|
Children
Children are independent people for tax purposes and are therefore entitled to their own allowances and tax bands. It may be possible to save tax by generating income or capital gains in the children’s hands.
Marriage breakdown
Separation and divorce can have significant tax implications. In particular, the following areas warrant careful consideration:
Married couples
Everyone is entitled to a basic personal allowance. This allowance cannot be transferred between spouses.
Where one spouse was born before 6 April 1935, a married couple’s allowance is available. This is given to the husband although it is possible, by election, to transfer it to the wife.
In general, married couples should try to arrange their ownership of income producing assets so as to ensure that personal allowances are fully utilised and any higher rate liabilities minimised.
When assets are jointly owned by husband and wife, any income arising is assumed to be shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset.
Tax TipReview the income split between husband and wife. Consider transferring assets to even up incomes. If the husband or wife is self employed their spouse could be employed or taken into partnership as a means of redistributing income. The Revenue may however look closely at such situations to ensure that it does not amount to an ‘arrangement’ to transfer income from a higher rate taxpaying spouse to one liable at the basic rate. |
Each spouse’s CGT liability is computed by reference to their own disposals of assets and each is entitled to their own annual exemption, currently £7,900 per annum. Gains above this level are charged to tax by treating them as the top slice of income and using the rates applicable to savings income.
Considerable CGT savings may be made by ensuring that maximum advantage is taken of annual exemptions together with the 10% and 20% tax bands.
This can often be achieved by transferring assets between spouses before sale - a course of action generally having no adverse CGT or inheritance tax (IHT) implications. Advance planning is vital and the possible income tax effects of transferring assets should not be overlooked.
Children
It may be possible for tax savings to be achieved by the transfer of income producing assets to a child so as to take advantage of the child’s personal allowance, starting rate (10%) and basic rate (22%) tax bands.
This cannot be done by the parent if the annual income arising is above £100. The income will still be taxed on the parent. However, transfers of income producing assets by others (eg grandparents) will be effective.
Tax TipA parent can allow a child to use any entitlement to the CGT annual exemption by using a ‘bare trust’, ie an arrangement whereby a beneficiary has an absolute right to property and income, but the trustees are the legal owners. |
Children or any other person whose personal allowances exceed their income are not liable to tax. Where income has had tax deducted at source, a repayment claim should be made. Remember that tax credits on dividends are not repayable (other than via PEPs and ISAs).
Child Trust Fund
A new Child Trust Fund is to be introduced for all children born from September 2002. The government will provide an initial endowment of £250 (£500 for low income families). Other features of the fund will include:
Child Tax Credit
The new Child Tax Credit was introduced on 6 April 2003 to replace the old Children’s Tax Credit. The new credit which is means tested is potentially available to families who have responsibility for one or more children.
The old credit operated by reducing tax liabilities. The new credit is a tax-free payment made direct to the main carer.
There are several elements to the credit but broadly the maximum is an annual amount of £1,445 per child together with a family element (one per family) of £545 per annum.
Tax TipMany families with children, whether or not the adults in the family are in work, are eligible for the new Child Tax Credit. Some credit is likely to be payable in 2003/04 if a family’s income is less than £58,175 a year or £66,350 if there is a child under one year old. |