11 - Tax (individuals and trusts)

Question 1

Two key points regarding limiting tax bill

Answer 1

• Utilise allowances as much as possible;
• Be wary of tax bands and especially high marginal tax bands:
  
  • Additional rate above £150k;
  • 60% marginal tax rate between £100k and £123k.

Question 2

Concerns around tax avoidance schemes

Answer 2

• They have to be registered and you have to make clear you are using them in your tax return, which can draw focus from HMRC that may be best avoided;
• The scheme may prove to be ineffective;
• The government may even introduce retrospective changes to law so you get penalised later.

Question 3

Key tax facts for couples

Answer 3

• Married couples can transfer £1,150 of their personal allowance, if they earn less than £11,500 and partner earns £11,500 to £45k;
• Spouses don’t pay CGT on transfers, no IHT either;
• Savings can be held in joint names, taxable on their share.
• Tax benefits only available to married couples or civil partnerships.

Question 4

Key facts about getting money out of a business

Answer 4

• Salary of £113-157 per week qualifies for state pension but attracts zero NICs;
• Otherwise dividends are an efficient way to get income from a company - your partner could become a shareholder to enable you to split income with them;
• A partnership can also achieve the same aim;
• Pension contributions are an allowable business expense.

Question 5

Consideration for clients born before 6/4/1935?

Answer 5

Married couples born before 6/4/1935 may be eligible for the married couples allowance, although it is withdrawn for income above £28k (by £1 for every £2).

Moving income between the spouses or switching out of income producing products could enable them to maximise this allowance and avoid the high marginal rate.

Question 6

How are children taxed on their income?

Answer 6

They have their own personal allowance.

However income over £100 that comes from a gift from their parents is taxed on the parent.

Question 7

Child Tax Credit

Who gets it?

What amounts?

Withdrawal rules

Planning implications

Answer 7

Anybody who looks after children under 16 (or under 20 in education/training) must claim from HMRC (backdated up to 1 month).

• Family element (£545) if at least one child was born before 6/4/17;
• Child element (£2,780 per child) limited to 2 kids if any are born after 6/4/17.

It is withdrawn (child element first then family) by 41p for every £1 earned over £16,105.

If clients are affected by this (i.e. joint earnings just over £16,105) they can use pension contributions to avoid super-high marginal tax rate.

Question 8

Child Benefit notes

Answer 8

Child benefit withdrawn gradually if a parent earns over £50k (adjusted net income).

That parent will get the amount of the child benefit taken out of their tax bill, up to 100% at £60k.

This is another high marginal rate so use pension contributions or charitable gifts to get below the £50k level.

Question 9

How often should will be updated?

Time limit for a deed of variation

Answer 9

Wills should be updated every 2 years.

Deeds of variation can be produced up to 2 years after death.

Question 10

IHT

Considerations for spouses

Answer 10

• Transfers between spouses are IHT free;
• Unused NRB can be transferred between spouses;
• If non-UK domiciled the free transfers between spouses are limited to £325k;
• Business and agricultural relief could be lost on inter-spousal transfer if the conditions are no longer met.

Question 11

IHT

Two advantages to Discretionary Trusts (i.e. CLTs)

Answer 11

• If you want the discretionary trust feature, i.e. beneficiary to be decided in the future, this is the only option;
• The value of the trust isn’t included in the beneficiaries estate (since the beneficiary is not determined), unlike an absolute trust. In some rare cases this could be useful.

Otherwise steer clear as they incur a CLT charge!

Question 12

IHT

How can assurance be used to help with IHT?

Answer 12

• Decreasing term assurance can be used alongside PETs to cover the potential liability, which decreases after 3 years down to zero at 7 years after the gift.
• The annual exemption, or normal expenditure exemption, can be used to pay premiums on life assurance policies written in trust. Payout of such a policy will be outside the estate of the deceased.

Question 13

IHT

Two key advantages of using trusts

Answer 13

• Cash can be provided whilst probate is being obtained, because the trust moves the assets outside the estate of the deceased;
• The settlor can be a trustee and therefore retain some control over the assets.