June 2017

Keep it in the family & double your Tax Allowances

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The UK tax system is built upon independent taxation. Individuals are taxed on their own income and gains and have their own set of tax allowances. For families this can lead to allowances being wasted and overall tax bills being higher than they need to be. In short an unnecessary drag on returns.

Treating the family finances collectively and getting the most out of the allowances on offer can boost savings. It’s just a matter of getting the advice right. While tax allowances can’t actually be passed on to partners, tax relief and taxable income and gains can.

The result - savings may last longer in retirement and increase the legacy available for future generations.

Double up on savings tax breaks
As a family unit the pension annual allowance doubles to £80,000 with half as much again available to pay into an ISA.

You can use your spouse or partner’s ISA allowance to save tax free. This now allows a couple to save up to £40,000 a year into ISAs.

What is perhaps less obvious is the ability to top up your spouse or partner’s pension. Thanks to tax relief flipping pension saving between different family members could secure a much better financial future for your family than saving into an ISA.

A squeeze on pension funding
Many have seen the scope for pension funding eroded by cuts in the Lifetime Allowance and the Tapering of the Annual Allowance. Those feeling the pension funding pinch may need to seek an alternative home for their retirement savings. But the most tax efficient solution could lie close to home – by topping up your spouse or partner’s pension.

Contributions aren’t limited to £3,600 but by the difference in your spouse’s current payments and your earnings. That’s potential for up to £80,000 of tax relievable pension savings each year.

There are also other reasons you may wish to direct your pension savings to a spouse for example;

  • Where one of you pays tax at a lower rate than the other it may make sense to divert pension saving to the one with the highest earnings to take advantage of more tax relief at higher rates
  • Switching funding to the highest earner could not only see an increase in the tax relief available but could also result in allowances being retained. For example, personal contributions reduce the income used to test eligibility for:
    Personal allowance (Reduces when income exceeds £100K) - a tax saving of up to £4,600.
    Child Benefit (Reduces when income exceeds £50K) - worth £5,002 for a family with 3 kids.
    Threshold Income for the Tapered Annual Allowance (£110K) - could mean extra £30K of pension funding available.

Two allowances are better than one when taking benefits
But it isn’t just when saving you can benefit from sharing allowances. Using two sets of allowances when accessing savings & pensions can reduce the tax payable giving the family more spendable income in retirement.

Transferring assets between spouses
There are also other allowances which spouses can use to access their savings tax efficiently.

Everyone has their own annual Capital Gains Tax (CGT) allowance. A disposal of a jointly owned asset would mean that two allowances could be used to offset any capital gains.

And it's possible to transfer assets between spouses without creating a tax charge. Not only can this mean that both allowances can be used but transferring assets to a lower taxpaying spouse could mean that gains in excess of the exemption can be taxed at 10% rather than the full 20% rate.

Changing who is taxable and the ability to control when tax becomes payable offer valuable planning options. Shifting the tax liability to a lower taxpaying spouse or partner can allow profits to be extracted tax efficiently. This could be a way of providing tax efficient retirement income or simply to allow existing investments to be recycled into something more tax efficient such as your pension or ISA.

Inheritance Tax (IHT) – Nil Rate Bands
Widow(er)s can also share any unused part of a deceased spouses IHT nil rate band. It's the unused percentage of the nil rate band from the estate of the first to die which can be claimed on the second death.

The Residence Nil Rate Band (RNRB) which is available where the family home passes to direct descendants on death are also transferable between spouses and civil partners. This is irrespective of when the first death occurred or whether they owned residential property on their death. 100% of the first to die’s RNRB can be claimed unless their estate was greater than £2M.

Summary

Considering finances as a family can boost lifetime savings and make those savings last longer.

It’s just a matter of getting the right advice!

This Briefing Note is provided for information purposes only and does not constitute any form of financial or investment advice. We believe the information to be correct at the time of going to press but we cannot accept any responsibility for any loss to any person as a result of action or refraining from action as a result of any item herein.

Printed and published by ©Holborn Financial Limited authorised & regulated by the Financial Conduct Authority. June 2017