Family Matters: Marriage & Children

Practical tax tips to guide you through the tax system and help you plan to minimise your liability.

Please use the guide to help you identify planning opportunities, pitfalls to avoid and areas where you may need to take action and then contact us for further advice.

The rules, rates and allowances in this guide relate to the 2024/25 tax year and these may be different for other tax years.

The general effect of the Civil Partnership Act is to treat registered civil partners on a consistent basis with married couples. For the purposes of this guide we have on occasions referred only to spouses.

Family Matters

Married couples

Spouses are taxed as independent persons, each of whom is responsible for their own tax affairs. The phrase ‘spouse’ whenever used in this guide includes a registered civil partner.

For spouses, there is no aggregation of income, no sharing of the tax bands and, except in limited circumstances detailed later in this guide, the personal allowance may not be transferred from one spouse to the other.

Minimising the tax bill

However, tax can be minimised if spouses equalise their income so that personal allowances, savings allowances and dividend allowances are fully utilised and higher/additional rates of tax are minimised.

Example
In 2024/25 Ian and Angela have savings income of £50,000, dividend income of £50,000 and no other income. If this is split equally between them, the total tax bill for the couple is £6,860. If only one spouse has an income of £100,000 and the other has nothing, the total tax bill leaps to £23,092 - an additional £16,232!
Tax Tip
A donation to charity under the Gift Aid scheme benefits from tax relief. It makes sense for a higher rate/additional rate taxpayer spouse to make such donations so that they can benefit from the extra tax relief.

Tax breaks for spouses

Married couples and civil partners may be eligible for a Marriage Allowance (MA). The MA enables spouses to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.

The option to transfer is available to couples where one party has not used all of their personal  allowance and the other does not pay tax at the higher or additional rate. If eligible, one partner will be able to transfer 10% of their personal allowance to their partner which means £1,260 for the 2024/25 tax year.

Relief is given as a basic rate tax reducer with a benefit of up to £252 (20% of £1,260). It is also possible to backdate your claim for previous years – please contact us if you think this might apply to you.

Jointly owned assets

Married couples will often own assets in some form of joint ownership. This can have benefits for income tax, CGT and even IHT.

Where assets are owned in joint names, any income is deemed to be shared equally between the spouses unless an election is made to split the income in the same proportion as the ownership of the asset.

This does not apply to shares in close companies (almost all small, private, family owned companies will be close companies) where income is always split in the same proportion as the shares are owned.

Example
A buy to let property is owned three quarters by Helen and one quarter by her husband Mark. If no election is made the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. A choice can be made according to which is the most desirable when other income of the spouse is taken into account.

Capital gains tax

Independent taxation also applies to CGT. Each spouse is entitled to take advantage of the annual exemption of £3,000 before any CGT has to be paid.

This is advantageous where assets are held jointly and then sold as each spouse can use their annual exemption to save tax.

The transfer of assets between spouses is neutral for CGT. This is sometimes done shortly before assets are sold to minimise tax. Advice should be sought before undertaking such transactions to ensure that all tax aspects have been considered. Please contact us for CGT advice.

Note that CGT neutral transfers do not apply to unmarried couples.

Children

Transferring income to children

If a child has sufficient income to make them liable, they will be taxed in exactly the same way as an adult. However they also benefit from their own personal allowances and tax bands. Where their only income is low, there may be some scope for transferring income producing assets to the children to use up their personal allowance.

Note that if assets are provided by a parent then the income remains taxable on the parent, unless it does not exceed £100 (gross) each tax year. However, this option could be considered where grandparents or other relatives wish to pass on wealth. Be mindful of capital and inheritance tax implications of the transfers of assets.

Tax Planning
Children may be employed in the family business so as to take advantage of their personal allowance (subject to legal restrictions). It is essential that payment is only made for actual work carried out for the business and at a reasonable commercial rate.

Children and capital gains

Children also have their own annual exemption for CGT, so assets transferred to them which are expected to grow in value may prove to be advantageous.

Child Trust Funds (CTFs)

The availability of new CTFs ceased from January 2011, as did government contributions to the accounts. Existing CTFs, however, continue to benefit from tax free investment growth. No withdrawals are possible until the child reaches age 18. However, the child’s friends and family are able to contribute up to the annual limit of £9,000. It is possible to transfer the investment to a Junior Individual Savings Account.

Junior ISA (JISA)

A JISA is available for UK resident children under the age of 18 who do not have a CTF account. JISAs are tax advantaged and have many features in common with existing ISAs.

They are available as cash or stocks and shares based products but a child can only have one cash JISA and one stocks and shares JISA. The annual investment is limited to £9,000.

Other children’s savings options are available which may be tax efficient such as National Savings Children’s Bonds and Friendly Societies’ savings plans.

High Income Child Benefit Charge

A charge arises on a taxpayer who has adjusted net income over £60,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. Where both partners have adjusted net income in excess of £60,000 the charge applies to the partner with the higher income.

Note in this case ‘partners’ does not just include spouses and civil partners but also couples living together as if they were married or in a civil partnership.

From 2024/25, the income tax charge applies at a rate of 1% of the full Child Benefit award for each £200 of income between £60,000 and £80,000. The charge on taxpayers with income of £80,000 or above will be equal to the amount of Child Benefit paid.

Child Benefit claimants are able to elect not to receive Child Benefit if they or their partner do not wish to pay the charge.

Equalising income can help to reduce the charge for some families.

Example
Phil and Jane have two children and receive £2,213 Child Benefit. Jane has little income. Phil expects his adjusted net income to be £70,000. On this basis the tax charge will be £1,107. This is calculated as £2,213 x 50% (£70,000 - £60,000 = £10,000/£200 x 1%). If Phil can reduce his income by £10,000 to £60,000 no charge would arise. This could be achieved by transferring investments to Jane or by making additional pension or Gift Aid payments.

Tax-Free Childcare

The scheme is available to families where all parents are working (on an employed or self-employed basis) 16 hours a week and meet a minimum income level (generally £183 a week for over 21 year olds) with each earning less than £100,000 a year. Parents who are receiving support through Tax Credits or Universal Credit are not eligible.

Parents need to register with the government and open an online account. The government ‘top up’ payments into this account at a rate of 20p for every 80p that families pay in. The scheme is generally limited to £10,000 per child per year. The government’s contribution is therefore a maximum of £2,000 per child.

Employer Supported Childcare closed to new entrants on 4 October 2018. Parents who qualify for both schemes are able to choose which scheme they wish to use but families cannot benefit from both schemes at the same time.

15/30 hours childcare

In addition, qualifying families will be entitled to free childcare. Families can receive up to 30 hours of free childcare for three and four year olds. From April 2024, there is an additional 15 hours of free childcare for two year olds. In September 2024, this 15 hours will be available for children aged nine months or over. The free childcare is available over 38 weeks and can be used flexibly with one or more childcare providers.

To find out about all childcare options click here.

What about unmarried partners?

It still pays to equalise income as much as possible, as income tax will be minimised. However, transfers of assets may be liable to CGT and, if substantial, could also lead to an IHT liability. It is vital for unmarried couples to each make a Will if they wish to benefit from each other’s estate at death.

A word of warning

Transferring assets or interests in a business between spouses may attract the interest of HMRC especially where it is obvious that it has been done primarily for tax saving purposes. Transfer of ownership of an asset must be real and complete, with no right of return and no right to the income on the asset given up.

If a non-working spouse is given shares in an otherwise one-person, private company, HMRC may, in some circumstances, seek to tax the working spouse on all of the dividends under what is known as the ‘settlements legislation’. You may want to consider obtaining advice from us before entering into this type of arrangement.

For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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Juliet Morris Director of Redshield Chartered Accountants
Jenny Dinnage Redshield Chartered Accountants Director
Rachel - an employee of Redshield Chartered Accoutants
Emma is an employee of Redshield Chartered Accountants
Amanda is an employee of Redshield Chartered Accountants

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Juliet Morris Director of Redshield Chartered Accountants
Jenny Dinnage Redshield Chartered Accountants Director
Rachel - an employee of Redshield Chartered Accoutants
Emma is an employee of Redshield Chartered Accountants
Amanda is an employee of Redshield Chartered Accountants

Redshield Chartered Accountants Team

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We’ll make your accounting easier.

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