Use your children to save tax

The inadequate increases in income tax personal allowances and tax rate bands in recent years has resulted in more and more people either starting to pay income tax or, even worse, being caught by the higher rate of income tax (because the higher rate threshold is nowadays much closer to average earnings in this country than ever before).

Just to refresh your memory, the higher rate of income tax currently stands at 41% (if you count the national insurance increase).

Today I will tell you how to save tax by legally diverting some of your income to your children.

The taxman tries his best to block diversion of income to minor children to make use of their personal allowances and thus avoid tax. Making direct gifts to children under 18 is not a very wise idea. This is because the income generated by the asset (e.g. interest or dividends on shares), either directly or from a trust set up for their benefit, will be taxed on the parents should it exceed £100 if the money originated with the parents.

Is there a way to ensure that income is taxed on the children so as to efficiently utilize their income tax personal allowances as well as lower-tax bands? Please carry on reading:

Remember that the taxman’s rules about taxation of income apply only to parents. Therefore, to sidestep these rules, get somebody else (e.g. grandparents, assuming they are well-off) to gift money to a trust for the benefit of the children. This way, the income is treated as the children’s and taxed on them. So, in theory up to over £35,000 gross can be diverted to the children without giving rise to the higher rate of income tax.

Diverting capital gains is easier as the rules for capital gains tax are far more relaxing. This means every individual in this country, including children, is entitled to an annual capital gains tax exemption of about £8,000. Any gains below this amount are exempt from CGT. Examples include quoted shares, unit trusts, investment trusts etc.

Use of such legitimate tax planning techniques is suitable to pay the child’s school fees. Although outside the scope of this blog, other tax-free ways to help towards meeting future child costs include Child Trust Funds, ISA’s, stakeholder pension plans etc. These offer different degrees of flexibility, risk and control.

One final word of caution: To keep control of the trust funds so that they are not spent irresponsibly (e.g. if you don’t want your son to spend his trust money on a sports car when he is 18!), you should make sure that you go for the right trust structure since there are different forms of Trusts.

Please contact us if you would like more information.

HMRC enquire into rental income

We know where you don't live - HMRC enquire into rental income.

HMRC is just starting – initially in a small way – to write to people who own UK property they do not appear to live in and are not declaring rental income. The opening letter is very mild in tone, but a non-response will escalate it into something rather more severe (and in the long run a challenge).

There is no obligation to reply to the initial letter but it would be stupid not to do so, especially since there will be many cases where there is no net profit because of mortgage interest.

Under the new penalty regime there may be substantial differences in what you have to pay, depending how early you respond – if there is taxable income which has not been declared and you play hard to get, your penalty is going to be higher and possibly much higher.

This is the shape of things to come, because HMRC is holding an enormous amount of data about property (not just UK property), bank accounts and so on, and is increasing the amount of data it exchanges with overseas tax authorities.

It is worth thinking, too, about the pressure Germany is currently putting on Lichtenstein as an example of what may happen to the European tax havens.

Campaigns like this one on rental property will become a major weapon in HMRC’s armoury. People who have not declared income from non-UK property and UK bank accounts would be well advised to go to the taxman before he comes to them.

You have been warned!

Small family owned businesses to be penalised from this April!

The Government is planning to launch a new Family Business Tax in this year’s Budget, which it claims is intended to tackle “income shifting”.

Please take a few moments to tell them why they should reconsider their plans, and forward this blog post to anyone you think might also be concerned at the new tax rules.

Remember - if you own a business jointly with a family member or anyone else, this will affect you: don’t miss your opportunity to do something about it.

The new laws, due to come into force from April 6th 2008, will:

• 
  mean a significant tax rise for jointly-owned businesses where profits are distributed equally between a husband and wife (or other family members / civil partners) and the recipients make differing contributions to the business - in some cases, even business owners who are not related to each other will be hit
  
• deny married couples who are equally exposed to the risks of running a business the right to an equal share in the rewards if the business is successful
  penalise people who followed the Government’s long-standing advice to set up businesses jointly
  
• make it impossible for businesses to self-assess their tax bills, and leave them perpetually looking over their shoulder in fear of an aggressive investigation by HMRC, in which they will have to prove that they have done nothing wrong
  
• be totally inconsistent with divorce law, as couples will be entitled to equal shares in the value of the business in a divorce, but not to equal shares in the profits while they are married
  
• be totally inconsistent with capital gains tax rules, as couples will be entitled to equal shares in the proceeds from business when it is sold, but not to equal shares in the profits when they own it
  
• reverse the independent taxation of spouses in respect of couples who own businesses, even though the Treasury’s consultation paper does not explain what has changed that would justify this reversal
  
• impose crushing burdens on small businesses who will have to record every contribution made to the business, simply to defend themselves against an attack from the Revenue - that time could be better used generating wealth for the economy
  
• fail to recognise that dividends or other profit distributions are a reward for taking risk and are not simply income comparable to a salary.

Take Action
Please sign the petition on the 10 Downing street website:http://petitions.pm.gov.uk/IncomeShifting1

The petition asks the Prime Minister to abandon the current plans to introduce a new “income shifting” tax on family businesses.

Please also consider writing to your MP on the subject and asking them to support Early Day Motion 714 against the proposals. Advice on how best to go about it is available from the PCG here:http://www.pcg.org.uk/cms/index.php?option=com_docman&task=doc_download&gid=367
There is further information about the “income shifting” Family Business Tax at www.familybusinesstax.co.uk.

The above information is taken from the Professional Contractors Group (PCG) membership mailing, and is reproduced with permission.

Government snoop on house-sale data

Government snoop on house-sale data

Detailed information on nine out of 10 house sales and rentals are secretly being passed from estate agents to HM Customs & Revenue (HMRC) without the public’s knowledge or agreement.

The Government has gone ahead with a deal with Rightmove, an online property search firm, to give HMRC staff access to its records of transactions. The records contain details about individual properties, including their sale price as well as any internal features and modifications that may add to their value.

Rightmove keeps data on 16 million properties.

You have been warned! If you rent or sell a property and don't declare the income it may only be a matter of time before "big brother" comes knocking on your door!`