Family tax efficiency planning for limited company directors

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As a limited company contractor, you’ll want to make sure you’re reaping the rewards of your busy WorkStyle – and who can blame you?

One of the ways you can do this is by organising your family’s finances so that they’re as tax-efficient as possible. Just in case you’re asking yourself how to do this, we’ve created a handy guide that tells you everything you need to know.

Married couples

As the name suggests, independent taxation means that married couples and people in a Civil Partnership are taxed separately on their income and capital gains – so they each have their own allowances and are responsible for their own tax affairs.

1. Income tax allowances and tax bands

While it’s not possible to transfer a basic personal allowance, you can make sure that your own allowance is used to its full potential and any higher rate liabilities are minimised.

HMRC has also recently announced a new marriage allowance. Under the scheme, £1,100 (10%) of the Personal Allowance can be transferred to a spouse, as long as the individual making the transfer has a taxable income of less than £11,000 a year.

There are certain restrictions for this though, so it’s a good idea to speak to your accountant if you’re thinking about applying for this.

2. Joint ownership of assets

If you jointly own assets (such as property) with your spouse, any income you receive (for example rent) is assumed to be shared equally for tax purposes. This is unless you decide to divide your income according to how much of the asset each person owns.

It’s possible for both spouses to own shares in a “close” company (those either solely owned by the directors or by five or fewer people) and receive dividends based on how much of the business they own.

3. Capital Gains Tax (CGT)

Each spouse receives their own annual CGT exemption of £11,100. Anything above this amount is taxed at either 18% or 28% depending on the size of your gain and taxable income. If you’re a higher or additional rate taxpayer, you’ll always be charged 28%.

It’s possible to reduce your tax liability by transferring assets between spouses before selling. This becomes particularly effective if one spouse is due to sell a capital asset within the year.

4. Inheritance Tax (IHT)

Although understandably you may not want to think about this, it’s important to plan for tax-efficiency in the event of your death. That’s because your spouse or beneficiary could be charged Inheritance Tax on your estate.

Your estate will be exempt from Inheritance Tax if you leave everything to your spouse or civil partner, as long as they live permanently in the UK. Similarly, any transfers made between you and your spouse will not be charged tax.

Inheritance Tax is charged at a rate of 40% on death and 20% on lifetime chargeable transfers, such as payments made into a trust. However, you may not have to pay tax depending on the amount of time between the transfer and your death.

For 2016/17, no tax is charged on any estate worth £325,000 or less – known as the “nil-rate band.” With the right planning, this can also be transferred to your spouse, potentially raising your Inheritance Tax threshold.

It’s possible to arrange your finances to reduce your Inheritance Tax liability and keep hold of your hard-earned assets. For more information about how to do this, please see our guide.

Children

Like married couples, children are also classed as independent people for tax purposes, meaning they have their own personal allowance. So, you can save tax by generating income or capital gains in their names.

1. Use of allowances and lower rate tax bands

You can achieve tax savings by transferring income producing assets to a child, as long as the annual income is below £100. Anything above this amount will still be liable for Income Tax, charged according to the parent’s personal tax rate.

In addition, you’ll need to consider if a gain is made when you transfer the asset, this may attract Capital Gains Tax. It’s therefore a good idea to speak to your accountant for further advice.

2. Child Tax Credit (CTC)

Under some circumstances, it’s possible to claim for child tax credits. Speak to an accountant if you think you’re eligible.

3. Child Benefit

You’ll usually get this if you’re responsible for a child, even if you’re not their parent. Only one person can claim Child Benefit for each child. One thing to consider though, is that if the income of one individual in the household exceeds £50,000 per year, then some or all of the Child Benefit could be repayable.

There are two rates, which are fixed until April 2016. They are:

Family tax efficiency planning child benefits

Need more help?

Hopefully, you’ll be all clued-up about family tax planning after reading this guide. If you need more advice, however, we’re here to help.

At ClearSky Contractor Accounting, we understand that everyone’s different. That’s why we’ll tailor our financial advice to your own personal circumstances. This lets you get on with what you do best, safe in the knowledge that you’re making the most of your assets.

For more information, please call 08001 244 042 or email enquiry@clearskyaccounting.co.uk.

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