If you look to the future, it is likely that you will have a range of different financial requirements and goals. You might be looking to maximise your wealth so that you can enjoy more of your hard-earned money now and during retirement. You may need to pay for your children’s education, or to help support ageing parents.
Tax and financial planning strategies 2020/21
Our tax and financial planning strategies 2020/21 website pages are designed to help you to make the most of your business and your personal finances by highlighting the main tax allowances and incentives and suggesting strategies that you might wish to incorporate into your own financial planning. For further information, please take a look at our other Tax and financial strategies 2020/21 website pages.
Tax and financial strategies 2020/21
Personal tax essentials - Tax and financial strategies 2020/21
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Tax and employment - Tax and financial strategies 2020/21
Personal and family financial strategies - Tax and financial strategies 2020/21
Retirement planning strategies - Tax and financial strategies 2020/21
Savings and Investment strategies - Tax and financial strategies 2020/21
Tax efficient estate planning - Tax and financial strategies 2020/21
Business exit strategies - tax and financial strategies 2020/21
Personal and family financial strategies 2020/21
Using allowances and exemptions
Each individual within your family is taxed separately, and is entitled to his or her own allowances and exemptions. The personal allowance (PA) is set at £12,500 for 2020/21, while the capital gains tax (CGT) annual exemption is £12,300.
By using the available PAs and gains exemptions, a couple and their two children could have income and gains of at least £99,200 tax-free, and income up to £200,000 before paying any higher rate tax. Through careful tax planning, we can help you and your family to benefit from more of your wealth.
Your tax planning objectives should include taking advantage of tax-free opportunities; keeping marginal tax rates as low as possible; and maintaining a spread between income and capital.
The Marriage Allowance
Some married couples and civil partners are eligible for the Marriage Allowance, enabling spouses to transfer a fixed amount of their PA to their partner. The option is available to couples where neither pays tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their PA to the other partner (£1,250 for the 2020/21 tax year). For those couples where one person does not use all of their PA, the benefit will be up to £250 (20% of £1,250).
Planning can be hindered by the potential for tax charges to arise when assets are moved between members of the family. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to CGT and inheritance tax (IHT). However, special rules govern the transfer of assets between spouses. In many cases, for both CGT and IHT there is no tax charge, but there are some exceptions – please contact us for further advice. In addition, gifts must be outright to be effective for tax, and must not comprise a right only to income. Careful timing and advance discussion with us are essential.
High Income Child Benefit Charge
A charge arises on a taxpayer who has adjusted net income over £50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £50,000, the charge applies to the partner with the higher income.
The income tax charge applies at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid. Claimants may elect not to receive Child Benefit if they or their partner do not wish to pay the charge. Equalising income can help to reduce the charge for some families.
Mike and Becky have two children and receive £1,820 Child Benefit for 2020/21. Becky has little income. Mike expects his adjusted net income to be £55,000. On this basis the tax charge will be £910. This is calculated as £1,820 x 50% (£55,000 - £50,000 = £5,000/£100 x 1%).
If Mike can reduce his income by a further £5,000 no charge would arise. This could be achieved by transferring investments to Becky or by making additional pension or Gift Aid payments.
Cap on reliefs
There is a ‘cap’ on certain otherwise unlimited tax reliefs (excluding charitable donations) of the greater of £50,000 and 25% of your income. This cap applies to relief for trading losses and certain types of qualifying interest.
Giving your children a good start
Funding university degrees and saving up a deposit for a first home are increasingly expensive prospects, so the sooner you start planning, the better. All children have their own PA, so income up to £12,500 escapes tax this year, as long as it does not originate from parental gifts. If income from parental gifts exceeds £100 (gross), the parent is taxed on it, unless the child has reached 18, or has married. Parental gifts could be invested to produce tax-free income, or in a Cash or Stocks and Shares Junior Individual Savings Account (Junior ISA) to build a fund to help offset university expenses and minimise debts. The £100 limit does not apply to gifts into JISAs or National Savings Children’s Bonds.
The government’s Tax-Free Childcare (TFC) scheme operates via an online childcare account. Under the TFC scheme, relief is given at 20% of the costs of childcare, up to a total childcare cost of £10,000 per child per year. The scheme is worth a maximum of £2,000 per child (£4,000 for a disabled child). All children under 12 years old are eligible (or up to 17 for children with disabilities), but parents must meet certain eligibility criteria.
If your child is grown up and financially secure, it may be worth ‘skipping’ a generation, as income from capital gifted by grandparents or more remote relatives will usually be taxed as the child’s, as will income distributions from a trust funded by such capital.
Maintenance payments do not usually qualify for tax relief. The special CGT and IHT treatment for transfers between spouses applies throughout the tax year in which separation occurs. For CGT, transfers in subsequent years are dealt with under the rules for disposals between connected persons, with the disposal treated as a sale at market value, which could result in substantial chargeable gains. For IHT, transfers remain exempt until the decree absolute. Timing is crucial; we can assist you.
A contingency plan
Contingency planning could help to protect your family if you die or become incapacitated. This might include taking out adequate insurance cover, perhaps with life assurance written into trust to ensure quick access to funds. It is also essential to make a Will. We also strongly recommend that you and your spouse:
make a living Will (also called ‘advance decisions’): so that your wishes are clear with regard to medical treatment in the event that, for example, you were seriously injured following an accident
execute a lasting power of attorney: so that if you become unable to manage your affairs as a result of an accident or illness, responsibility will pass to a person of your choosing.
Remember to tell your spouse, your parents, and your business partners where your Will and related documents are kept. If you are passing on responsibility for managing your affairs, it might be advisable to talk matters through with them.
Billions of pounds of assets lie unclaimed in the UK! To see if you have lost assets contact the Unclaimed Assets Register on 0333 000 0182 or visit www.uar.co.uk (NB: a charge applies for this service). To find out if you have an unclaimed Premium Bond prize, call 08085 007 007 or visit www.nsandi.com.
A UK resident and domiciled individual is taxed on worldwide income and gains. Non-UK domiciles who are UK resident can claim the remittance basis of taxation in respect of foreign income and gains, with the effect that they are only taxed if foreign income and gains are brought into the UK. They will however lose their entitlement to the personal allowance for income tax and the annual CGT exemption. There may also be a significant ‘remittance basis charge’ to pay. The non-UK domicile is also potentially favourably treated for IHT, as they only pay IHT in respect of UK assets, as opposed to their worldwide assets.
An individual who has been resident for at least 15 of the last 20 tax years will be deemed UK domiciled for all tax purposes. In addition, those who had a UK domicile at the date of their birth will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if, under general law, they have acquired a domicile in another country
If you would like to discuss your personal and family tax and financial strategies, please get in touch with the team of tax specialists at DRG Chartered Accountants. We would be delighted to arrange a complimentary meeting to discuss your personal circumstances, long term goals and possible financial strategies.
DISCLAIMER: This information is for guidance only, and professional advice should be obtained before acting on any information contained herein. We will not accept any responsibility for loss to any person as a result of action taken or refrained from in consequence of the contents of this publication.