Tax planning - your family

Looking at your household income as a whole, and planning efficiently to make optimal use of all the allowances available to each person, is the best way to ensure the tax position for your family is as strong as it can be.

You and your spouse

The income of each spouse is taxed separately, with each party being entitled to a personal allowance. Capital gains are also taxed separately, each party having their own annual exemption (see below).

Where you each have a different tax band, a key part of planning is getting the right distribution of income between you. This can ensure that the personal allowance of the lower income spouse is not wasted, and give access to lower tax bands. Transferring income-producing assets, such as property, stocks and shares, or even bank accounts, can be an efficient way to do so.

An optimal allocation of income between spouses will become more important in the future, especially with the fall to the additional/top rate threshold for income tax.

Make sure you consult with an adviser before taking action in this area to ensure that any arrangements are compliant with anti-avoidance legislation. It is important, for example, that a transfer is an outright gift, with the donor no longer exerting control over it, or deriving a benefit from it. Appropriate evidence of such transfer is needed.

You may also wish to discuss any transfers to your spouse with your lawyer so that any legal considerations, such as divorce law, are taken into account.

High Income Child Benefit Charge (HICBC)

Where either you or your partner receive Child Benefit, and have adjusted net income more than £50,000, the HICBC applies. Note that for the HICBC, ‘partner’ doesn’t just mean spouse or civil partner, but also includes someone you live with as if you were married.

The HICBC claws back Child Benefit at a rate of 1% for every £100 of income between £50,000 and £60,000. By the time income is £60,000, all Child Benefit payment is effectively lost. You can disclaim payment in these circumstances, to avoid having to pay the charge: but it is usually recommended that the actual claim itself is continued, in order to maintain eligibility for the State Pension.

If both you and your partner are over the income threshold, HICBC is the responsibility of whoever has the higher income. Where income reaches £50,000, the taxpayer has an obligation to notify HMRC of their liability to the charge. HMRC may make the initial contact, but this should not be relied upon.

Top tip: managing your income split to avoid the HICBC

Think tactically where there is discretion over how income is distributed between you and your spouse. £100,000 split equally between you and your spouse, for example, keeps you out of HICBC: if it is all taxable on one spouse, the benefit of Child Benefit payment is lost. We can help you review ways to reduce or redistribute taxable income in your circumstances.

Tax planning with children

Children are treated independently for tax purposes. They have their own personal allowance, annual capital gains tax exemption, and their own basic rate tax band and savings band. From a tax perspective, it is usually more efficient for grandparents - rather than parents - to provide funds for investment for underage children.

When it comes to funding children through university, parental input is increasingly common, and the purchase of housing is something often considered. It is important that any such arrangement is structured correctly. Key questions are who owns and buys the property – whether it is the parents, or the parents and child together, or whether the child is provided with funds to make the purchase. The tax and legal implications need to be thought through, alongside your personal and family preferences.

Top tip: making use of the rent-a-room scheme

Children living in a property at university which they own outright, and letting out furnished accommodation in the property, may be able to benefit from the “rent-a-room” scheme. Provided the relevant conditions are met, the scheme could allow them to earn up to £7,500 in rent, free of tax. When added to the personal allowance, this provides scope for £20,070 in tax-free income.

Read the next section of our tax planning guide: Savings and investments or return to the main page.