Year End Tax Planning: Helping Your Family
As we approach the end of the financial year, it is important to review your financial and taxation position. Whilst in our last article in this year-end tax planning series, we took a look at pensions and tax efficient investments, in this article, we highlight some of the ways your tax planning can help your family.
There are a number of tax efficient methods by which you can help your children and grandchildren. Funding these opportunities will be a lifetime gift for inheritance tax purposes reducing your taxable estate. They may also generate tax benefits for your children and grandchildren with either tax credits at source or reduced income tax liabilities.
Earnings
Each child can have tax free income of up to £12,570 in 2024/25 and they do not start paying higher rate tax until their total income exceeds £50,270.
Teenagers can go out to work and their earnings will often be tax free if they have no other income. This can include working in the business of a parent for a reasonable salary.
Trust distributions
Where a child is over the age of 18 or is a beneficiary of a settlement or trust not created by their parents, income distributions by:
- UK resident trustees can result in some or all of the 45% tax paid on the distributions being recoverable by the child from HMRC
- Non-UK resident trustees can result in income that would otherwise be distributed to their parents being subject to tax at lower marginal rates (e.g. the basic rate band) or using otherwise unused personal allowances.
However, income of more than £100 derived from a gift from a living parent is taxed as the parent’s income if the child is less than 18 years of age and unmarried. The exception to this is income within a Junior ISA.
Junior ISAs
Children can have a Junior ISA if they are under the age of 18 years, live in the UK and do not already have a Child Trust Fund.
There is no tax to pay on the income or capital gains within the Junior ISA. Parents, grandparents, other relatives or friends can put money into the Junior ISA up to the total maximum limit of £9,000 in 2024/25. The Junior ISA can be invested in cash, stocks and shares.
The funds within the Junior ISA belong to the child and can only be taken out when the child reaches the age of 18 or they can be transferred to the ISAs available to adults. None of the income arising within a Junior ISA is taxable on the child’s parents.
Junior ISAs may be an effective way of funding university fees and can help with buying a child their first home.
In addition to any funds in a Junior ISA, 16 and 17 year olds can invest £20,000 in a cash ISA in 2024/25.
Lifetime ISAs
These can be opened if your age is between 18 and 40 and allow you to save up to £4,000 each year and receive a government bonus of 25% of the amount subscribed up to a maximum of £1,000. The lifetime ISA limit of £4,000 counts towards your annual ISA limit. This is £20,000 for the 2024/25 tax year. Contributions have to cease by the time you are 50. The funds in the ISA can be withdrawn tax free if used to buy your first home, you are aged 60 or over or have a terminal illness with a life expectancy of 12 months or less. If funds are withdrawn other than in these circumstances, a 25% tax charge is payable.
Pensions for non-taxpayers
For those without earned income and under 75 years of age, a pension contribution of £2,880 can be made regardless of income levels. Basic rate tax relief of £720 can be reclaimed by the pension provider from HMRC resulting in a gross pension contribution of £3,600.
Pension contributions by members of your family
Pension contributions by family members, such as parents or grandparents, remain a useful and effective way to cascade funds into the next generation’s pension fund.
The contribution is enhanced by income tax relief at the basic rate and, if the person on whose behalf the pension contribution is made is a higher rate tax payer, then additional tax relief will be available to them.
In the case of single payments, the contributions will be a potentially exempt transfer for inheritance tax purposes and will fall out of account after seven years. If they form a series of payments, or are anticipated to be so, then they may be exempt from inheritance tax as normal expenditure out of income.
We hope you have found the suggestions above helpful. In our next article in this series, we will be looking at tax planning for business owners and entrepreneurs. As always, please contact us to discuss your circumstances with you.
These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.
