Minimising the family tax bills

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Today I will write about the simple ways to keep your tax bills down.  Lots of column inches in papers are used up talking about complex tax avoidance schemes – often the ones which HMRC then stops.  Yet millions of pounds is lost each year because normal families ignore simple tax tips.

Firstly I will talk about savings income.  If you pay tax at 40% or 50% and you receive bank interest or dividends then there is extra tax payable on that income.  It will normally work out at 25% of the net interest or dividend you received.  For this reason the choice of who holds the savings is important.

Joint savings – a good or a bad thing?  If one of you pays 40% tax and the other does not then joint savings may cost you extra tax.  With joint savings accounts then the interest MUST be shown as 50% each.  You cannot choose to declare it as your spouse’s or partner’s simply because they pay less tax.

There is a special form which can be used to declare an unequal share of joint property.  It cannot however be used for bank and building society accounts.  It is called form 17 and you can download one at . This form should be read carefully to check whether you qualify to use it. It can only be used where property is genuinely owned in unequal shares.  A rental house for example could be owned as ‘tenants-in-common’ on a one-third/two-thirds basis.  Once the election on form 17 is sent to HMRC then the income derived from the house can be split on the same basis.

Such splitting as above has a direct impact for your Capital Gains Tax positions so tread carefully.  Professional advice is probably worthwhile.

Jointly held shares will normally mean the dividends are taxable 50:50 on each party.  In the unusual situation where the shares are held unequally then the above election could be made.  Note shares in ‘close companies’ (broadly family companies) do not qualify.  So think in terms of this option only being available for publicly quoted companies – BT, M & S, Shell – that sort of thing.

It is easy for me to say put the money into your spouse or partner’s name to save tax.  That ignores some of the practical constraints on such action, including:

  • The money might be currently tied up in an account requiring 6 months notice.
  • If you separate then they have possession of ‘your’ money.
  • If you are unmarried then the money could be counted as theirs should they die.
  • If you are married then if they die it will be a little harder to get at the money than with a joint account.

Gift Aid payments to churches or charities should be made in the name of the party who pays 40% or 50% tax.  By telling HMRC (or showing it on your Self Assessment Return) you can then save some tax.  And of course even if you only pay 20% tax your charity will always benefit by you using Gift Aid forms. (Do not use Gift Aid if you pay no tax.)

If you don’t want to pay tax at all on your savings then there a number of safe tax-free ways to achieve this.  Firstly there are the cash-ISAs available from banks, building societies and National Savings – where you can save up to £5,200 each year.
Secondly there are Premium Bonds.  Here your original investment is always there for you – no risk.  You can get the money within about 10 days.  Instead of receiving interest you receive prizes which are tax-free.  Once you hold a lot of bonds (say £20,000 or more) then the prizes will arrive quite often.  With average luck your prizes would represent a return of 1.5%.  This is attractive as it is tax-free, and especially so to higher-rate taxpayers.  Prizes range on size from £25 to £1 million.  One person wins £1 million every month.

Thirdly don’t forget that probably everyone in the house can have a pension plan and get tax-relief added to it – children included.  Everyone can put in £3,600 per year, but because of the tax relief you need only write a cheque for £2,880.  The money can’t be blown in their twenties which is a big attraction.  My school-kids have a pension plan – have yours?

Finally there are various safe and tax-free investments from National Savings – see

Do not be tempted to put your savings into your children’s names to save tax.  You must declare the income as yours so there is no point.
The best interest rates on savings accounts can be found by looking in the Sunday Papers (Money section of Sunday Times for example) or by researching on the internet. lists interest rates and account restrictions from loads of banks.

Huston’s Hint

Get your kids a pension plan. Where else will £2,880 grow instantly by 25% and then continue to grow tax-free?