Planning for yourself and your family

Realising your goals

Regardless of your age, personal situation or financial circumstances, you will have a range of different goals for yourself and for your family. These may include: raising young children and saving for their education; helping to care for and support ageing parents; achieving the standard of living you want for your household; and funding your retirement. As your accountants, we can help you to put in place strategies to help you achieve your objectives.

We begin by looking at some of the useful strategies you could apply within the family.

Making the most of allowances and exemptions

Each member of your family is taxed as an individual, and so is entitled to his or her own allowances and exemptions. The basic personal allowance for 2012/13 is £8,105.

Allowances and rate bands are allocated first to your earned income (which includes pensions), then to your savings income, and finally to any UK dividend income.

Aged over 65?

The personal allowance for 2012/13 for those aged 65 to 74 at 5 April 2013 is £10,500, and for those aged 75 or over it increases to £10,660. Both higher allowances are scaled back if income exceeds £25,400, but in any event the minimum personal allowance is £8,105. The £7,705 married couple's allowance applies where at least one spouse was born before 6 April 1935 and is given as a tax reduction at 10% of the allowance. It may be reduced if the husband's income exceeds £25,400. This is subject to a minimum tax reduction of £296. For marriages on or after 5 December 2005 and for civil partners, it is the income of the spouse or civil partner with the most income which governs the scale back.

Age at 5 April 2013	Personal allowance	Maximum Married couple’s allowance
To 64	£8,105
65 - 74	£10,500
75+	£10,660
Elder spouse		Tax reduction
76+		£770.50
Minimum		£296.00

Tax and the family

With careful planning, using the available personal allowances and gains exemptions, a couple and their two children could have income and gains of at least £74,820 tax-free, and income up to £169,900 before paying any higher rate tax.

Planning objectives should include making the most of tax-free opportunities; keeping marginal tax rates as low as possible; and maintaining a spread between income and capital.

Income tax and capital gains tax rates for 2012/13
Rate Band	Taxable Income	Earnings etc	Savings	Dividends
Basic	Up to £34,370	20%	10%/20%*	10%
Higher	Over £34,370	40%**	40%**	32.5%**
Additional	Over £150,000	50%	50%	42.50%
Capital Gains
First £10,600	Tax-free
Remainder	18%/28%***

* There is a 10% starting rate for savings income up to the starting rate limit (£2,710) within the basic rate band. Where taxable non-savings income does not fully occupy the starting rate limit the remainder of the starting rate limit is available for savings income.

** Personal allowance is reduced by £1 for every £2 that adjusted net income exceeds £100,000. The effective marginal rate in this band is 60% (dividends 48.75%).

*** Depends on the level of income and gains.

The 50% (or additional) top income tax rate

The top rate of income tax, for those with taxable incomes in excess of £150,000, is 50% (42.5% for dividends). These rates will be reduced to 45% and 37.5%, respectively, from 6 April 2013. Talk to us now for our latest thoughts on minimising the impact of the top tax rates.

A '60% tax rate'?

Personal allowances are scaled back if income exceeds £100,000, giving an effective tax rate on a £16,210 slice of income of 60%.

With care, it might be possible to reduce your taxable income and retain your allowances. Only those pension contributions where tax is deducted at source will qualify to reduce taxable income to prevent/reduce withdrawal of the allowance.

Transferring your assets

Planning can be hindered by the potential for tax charges to arise when assets are moved between family members. Most gifts are potentially taxable as if they were disposals at market value, with a resulting exposure to CGT and IHT.

However, there are special rules for spouses on the transfer of assets. In many cases for both CGT and IHT there is no tax charge, but there are some exceptions we can advise you on.

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 is essential.

Case Study 1

James is a single person with a gross 2012/13 income of £45,000 (made up of £25,000 earnings, £5,000 of interest and grossed-up UK dividends of £15,000) and capital gains of £11,000 (assuming no other reliefs, etc). He would have a tax liability of £6,559.12

	Earnings	Interest	UK Dividends	Gains
Income and gains	25,000	5,000	15,000	11,000
Deduct: Personal allowance	– 8,105
Deduct: CGT exemption				-10,600
Taxable	16,895	5,000	15,000	400
Tax at:
20% on	16,895	5,000
10% on			12,475
32.5% on			2,525
28% on				400
Totals	£3,379.00	£1,000	£2,068.12	£112.00
Total tax liability				£6,559.12

Saving for your children

One of the most notable financial challenges facing children today is the amount of debt they will have incurred by the time they leave university. The introduction of higher tuition fees means that student debt is likely to rise significantly in the coming years, with the latest studies suggesting that a student starting university in 2012 will leave with debts in the region of £53,000-£60,000.

For younger children, the Child Trust Fund (CTF) created the opportunity for parents, grandparents and other family members to build - with Government help - a fund to help offset university expenses and minimise debt at the start of the child's working life.

The CTF closed to new entrants at the beginning of 2011 but the new Junior Individual Savings Account (ISA) announced at that time is now available. Further details are provided in this guide.

Every child has their own personal allowance, meaning that income up to £8,105 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 married. Thus parental gifts should perhaps be invested to produce tax-free income, or accumulate income, or in a cash or stocks and shares Junior ISA. The £100 limit does not apply to gifts into CTFs, Junior ISAs or National Savings Children's Bonus Bonds.

Generation skipping

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.

Marriage breakdown issues

Maintenance payments do not usually qualify for tax relief. Similarly, maintenance payments received under orders or agreements are not taxable. However, tax relief worth up to £296 this year is given on maintenance paid to a former spouse under orders or enforceable agreements, as long as at least one of the former parties to the marriage was born before 6 April 1935.

The special CGT/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.

Therefore, careful consideration on the timing of such transfers is needed.

Contingency planning

How would your spouse and/or children manage if you died or were incapacitated tomorrow?

Beyond taking the obvious step of ensuring you have adequate insurance cover, with life assurance perhaps written into trust for your spouse or children to ensure quick access to funds, you need to make a Will. We also strongly recommend that you:

• Make a living Will: so you can make clear your wishes in the event that, for example, you are pronounced clinically dead following an accident

• Execute a lasting power of attorney: so that if you become incapable of managing your affairs, whether as a result of an accident or illness, you can be assured that responsibility will pass to someone you choose and trust.

Of course, all of this also applies for your spouse. Make sure that your family protection planning considers the possibility that both parents may be simultaneously killed or incapacitated.

On a practical note, tell your spouse, your parents, and your business partners where your Will and any related documents are kept - it is still up to you to decide whether to tell them what the documents contain, but if you are passing responsibility for managing your affairs on to others, it would be advisable to talk matters through with them now.

Unclaimed assets?

Billions of pounds worth of assets lie unclaimed in the UK. To see if you have any lost assets contact the Unclaimed Assets Register on 0844 481 8180.

To see if you have an unclaimed Premium Bond prize, call 0500 007 007 or visit www.nsandi.com.

Taxation of non-domiciliaries (non-doms) and others entitled to claim the remittance basis for UK taxation

The rules are complex and a full analysis is beyond the scope of this guide, so please talk to us if you are affected. But as a very brief summary of the position for 2012/13:

• If your unremitted foreign income or gains exceed £2,000, you will have to make a choice of whether or not to include them in your self assessment return for 2012/13 and lose the income tax personal allowance and CGT annual exemption.

• If you are an adult caught by the 'years of residence rule' you will have to make a choice of whether to include them in your self assessment return for 2012/13 and pay UK tax or pay the £30,000/£50,000 'Remittance Basis Charge' (RBC). The decision is made when you complete your 2013 Tax Return, and the tax will be payable as 2012/13 tax

• You may be able to claim credit for the UK tax or RBC against your liability elsewhere in the world, and possibly against the UK liability when the income or gains are eventually remitted.

• The concept of what constitutes a remittance goes beyond money you bring into the UK. For example, tax will be due on the remittance to the UK by certain close family members of income or gains gifted by you to them outside the UK, and on the import of assets bought outside the UK using untaxed income or gains (subject to limited exemptions). However, the RBC will not apply where non-doms remit foreign income or gains to the UK for the purpose of commercial investment in UK businesses, nor (subject to conditions) when certain property is brought to, and sold in, the UK and the proceeds are then taken offshore.

• Key to managing your tax liabilities is the ability to identify and track capital, income and gains. People affected should seek advice on keeping different types of funds separate, how to remit 'clean' and 'tax-paid' income and gains, and on how money brought into the UK from mixed funds will be taxed.

Looking to the future

Proposed for 2013 is legislation to increase the inheritance tax-exempt amount that a UK domiciled individual can transfer to their non-UK domiciled spouse or civil partner. The Government similarly proposes to allow individuals who are domiciled outside the UK and who have a UK domiciled spouse or civil partner to elect to be treated as domiciled in the UK for the purposes of inheritance tax.

Checklist: Financial protection strategies
	Self	Spouse
Essential:
Will
Living Will
Lasting power of attorney
Life assurance
Keep papers in a safe place – and make sure other people know where they are!
Seriously consider:
Income, mortgage and loan protection insurance
Estate planning to minimise the tax due on your estate
Planning for the transfer of your business
Other points to think about:
Funeral arrangements and expenses
A tax-efficient gift strategy

Follow-up - Contact us about...

• Understanding the tax allowances and rates available to you
• Making the most of tax-free opportunities
• Ensuring that tax rates are as low as possible across the family
• Using savings, capital and other vehicles to give your children a better start in life
• Drafting a Will
• Making a living Will and giving someone you trust a lasting power of attorney over your affairs
• Insuring your life and obtaining disability and critical illness insurance
• Saving for income and investing for capital growth