Personal and
family tax
planning

1 Make sure you tell HM Revenue & Customs (HMRC) which of your properties should be treated as your main home for tax purposes when you buy a second (or even third) home. Any property that has always been your main home is free of capital gains tax. So is the gain attributable to any periods in which any other property has been your main home, plus the gain for the last three years of ownership, even if you did not live there during the period.

2 If you are getting married (or entering into a civil partnership) and you and your partner own separate properties and continue to live in both homes, you need to nominate one of them as your main residence within two years of the date of your marriage. A drawback of marriage is that you can have only one main home. Nominate the one that is likely to make the most use of your capital gains tax exemption, otherwise HMRC will choose the property you occupy most.

3 If you have a company and you and your husband, wife or civil partner are both involved in managing it, it makes sense for both of you to be directors. This will make you much less vulnerable to HMRC claiming that any dividends from the company to both spouses should be taxed on the spouse who does most of the work in the company, as it tried to do in a recent landmark tax case. Dividends can still be a very tax efficient way to draw profits from small companies.

4 Pay your spouse or partner wages for their work in your business and benefit from both a national insurance contribution (NIC) credit and a tax deduction. HMRC will expect to see evidence that the wage is not excessive in relation to the work performed. At a wage of £85 to £97 a week, your spouse or partner will receive an NIC credit that counts toward the state basic and second pensions and it should normally be free of tax and NICs.

5 Submit a claim for the Child Tax Credit if you have a child under 16 years old, even if your family income may currently be too high (normally over about £58,000) to qualify. Then, if your income suddenly drops, you can amend your existing claim to receive the tax credit right from the start of the tax year. If you waited to make afresh claim, it would only be backdated for three months.

6 Contribute up to £1,200 each year into your son’s or daughter’s tax- free Child Trust Fund savings account. The fund will build up free of tax on investment income and capital gains – just like an ISA – until the child reaches 18 when the funds can be withdrawn. Every child living in the UK and born after 31 August 2002 should receive a voucher from HMRC to open a Child Trust Fund.

7 Make sure you claim your entitlement to Child Benefit. It is not means tested or taxable. If you fail to claim, you are missing out on £907.40 a year for your eldest child, and £608.40 a year for other children. It could also mean the child will not receive the £250 voucher to open a Child Trust Fund account. And the parent who stays at home to look after the child will not get Home Responsibilities Protection, which stops the parent’s time away from work reducing their state retirement pension.

8 Your company or business could employ your teenage child. The wage will qualify for tax relief. If the work is safe and does not require heavy lifting, it is perfectly legal to employ children aged 13 and over. The hours worked must not impinge on school time and should not be before 7am or after 7pm.

9 Contribute to a baby’s or toddler’s pension scheme – instead of giving cash or other investments. If you make the maximum net contribution that qualifies for tax relief (£2,808 – ie £3,600 gross) each year until the child is 18, it will give your child’s fund a huge boost. What is more, they will not be able to squander the money when they reach age 18 – unlike many other trust funds.

10 If your marriage is breaking up permanently, aim to divide up the valuable assets, such as shares and land, as soon as possible. If you can complete these transactions in the tax year in which you separated, you will not have to pay capital gains tax on them, but if you delay until the next tax year, the tax charge could be painful.

11 Get tax relief of up to 40% on premiums for life assurance policies taken out under pension plan rules. The tax-free lump sum death benefits, taking all your pension schemes together, can now be as much as £1.5 million. The cover does not have to be taken out as part of a retirement scheme and can last until you are aged 75. Check to make sure it is worthwhile for you before you cancel your old policies and take out a new one.

12 Maximise your age allowance. Once you are aged 65 you may qualify for an extra tax allowance of £2,245 (for 2006/07) or £2,385 if you are 75. However, this extra age-related allowance is reduced by £1 for every £2 by which your total income exceeds £20,100. This cutback in your age allowances is equivalent to a tax rate of 33% on about £4,500 of your income over £20,100. One way to alleviate this problem is to make a pension contribution if you are under 75, and there are several other possible strategies.

13 Check your PAYE code. Up to a quarter of all PAYE codes are incorrect when first issued. HMRC may have included an estimate of your unearned income for the year, which means you will pay tax on that income far earlier than you would otherwise through your self-assessment tax return. You can ask HMRC to remove this estimated income and correct any other errors.

14 Check that your NICs are not excessive. When you have more than one job, or you are both employed and self-employed at the same time, you may well overpay your NICs. You can reclaim any overpaid NICs from HMRC after the end of the tax year, but the refund can take some time to arrive. You can avoid the over payment in the first place by deferring payment on one of your jobs if you complete the form in the HMRC leaflet CA72A or CA72B.