The summer budget a couple of weeks ago included a number of interesting measures. From a taxation perspective the most far reaching one is probably the proposed change to the taxation of dividend income. This will have implications for many, in particular those with their own companies who have followed a remuneration strategy of taking a small salary and topping up with dividend.
In this blog though I want to focus on the tax benefits of shifting some of your income to your spouse or children.
From April next year, the personal (tax free) allowance will be £11,000, there will be an exemption from tax on the first £5,000 of dividend income and a personal savings allowance of £1,000. The personal savings allowance is reduced to £500 for 40% taxpayers and to nil for 45% taxpayers. This is all subject to confirmation in next year’s finance bill, but in all likelihood what this means is that someone can have income of up to £17,000 with no tax to pay.
That someone could be each of your children or your spouse. If you are paying tax at 40% or 45%, or even 60% if your income falls in the band of £100,000 to £121,200 where the personal allowance is progressively withdrawn, then it makes sense to transfer some of your income producing assets to your children or spouse.
Of course, this is unlikely to work if all your income is from an employment or where the children are under 18. But if, for example you have children at university who you are supporting and you have income producing assets, such as stocks and shares or a buy to let property, then transferring some of those assets, or giving a share in them, to your children can give rise to significant tax benefits. For a 40% taxpayer up to £6,425 and for a 45% taxpayer, £7,305.
Making such transfers may have capital gains tax implications and these will need to be carefully considered. In many cases though the annual capital gains exemption and spousal exemption will help avoid any capital gains tax liability.