Family tax planning

Everyone has tax allowances - the "personal allowance" of tax-free income, and the lower rates of tax which apply to the first £28,400 of taxable income. If you pay the top rate (40%), the personal allowance and lower rate are worth nearly £7,500 in tax saved.

The problem is that not everyone is able to use their allowances in full. In the "traditional" family, where one partner goes out to work and the other raises the children, the carer (and the children) don't have much income. If the "breadwinner" is a higher rate taxpayer, this is a waste.

Take two couples. In one, each partner has a total taxable income of about £30,000. They will pay about £5,400 in tax each, £10,800 in total. In the other, one partner has an income of £60,000, and the other has none. The earner will pay about £16,900 in tax - over half as much again as the couple who can split their income.

In 2001/02, the new "Children's Tax Credit" will increase the difference for couples with children by up to another £520. It will only be fully available to couples where neither partner is a higher rate taxpayer. The first couple in the previous paragraph will only pay about £10,300 after CTC, if they have a child, but the second couple will still pay £16,900.

It is not always easy to transfer income between husband and wife in order to take advantage of allowances, but the following methods are possible:

an outright gift of savings and investments which produce taxable income;
putting savings and investments into joint names and sharing the income;
employing the spouse in a business;
taking the spouse into partnership in a business.

It is even harder to transfer income from parents to their own young children - and a scheme involving "bare trusts" was closed down in 1999 (although such trusts set up before then still enjoy their tax advantages). But gifts of savings from grandparents and others will produce income which is only taxable on the child, and will therefore probably not be taxable at all.

Actionpoint:

CAN INCOME BE TRANSFERRED TO REDUCE THE TAX ON IT?

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