View more on these topics

Children&#39s tax credit where it&#39s due

For those of you who regularly advise couples living together and

financially supporting children, life will get increasingly awkward from

April 3, 2001. You will need to start preparing for it now, if you have not

already done so.

In last year&#39s Budget speech, Chancellor Gordon Brown announced the

Government would introduce a new children&#39s tax credit from April 2001.

In a significant shift in Government policy away from fiscal support for

marriage to fiscal support for children, he announced that the new tax

credit would replace the married couple&#39s allowance for those aged under


This is an interesting use of the word “replace” as the married couple&#39s

allowance disappeared this month – a year before the arrival of the new tax


How will children&#39s tax credit work? It will take the form of an allowance

which attracts income tax relief at a flat rate of 10 per cent. The

allowance for the first tax year will be £4,160. However, where the person

claiming the allowance is subject to higher-rate tax, the allowance reduces

by £2 for every £3 of income above the point at which he or she starts to

pay higher-rate tax.

This will remind you of the limits on age-related personal allowances.

Indeed, the tax traps we are all too familiar with on age allowance will

also arise here. However, the familiar solutions are also available.

Unlike income-producing investments, life policies do not produce amounts

included in income where withdrawals do not exceed the 5 per cent annual


However, in calculating the children&#39s tax credit available, income does

include chargeable gains on life policies such as where withdrawals exceed

the 5 per cent allowance. Thus, basic-rate taxpayers may find the full

amount of the gain, without the benefit of top-slicing, will serve to

reduce or erase their right to children&#39s tax credit, resulting in a

greater income tax liability. This occurs even though they may escape a

higher-rate liability on a chargeable gain by claiming top-slicing relief.

Similarly, higher-rate taxpayers could suffer a “double whammy” by having

to pay higher-rate tax on the gain as well as suffering a cut in their

right to children&#39s tax credit.

Who will get the tax credit? The following applies where a couple who are

married or living together have at least one qualifying child under age 16

living with them.

Where neither is a higher-rate taxpayer, the higher earner will get the

tax credit. However, the lower earner can elect to share the credit equally

between them or the couple can elect for the lower earner to receive all

the credit.

Where one is a higher-rate taxpayer or they are both higher-rate

taxpayers, the higher earner will receive all the tax credit. The allowance

will then reduce by £2 for every £3 of income above the point at which they

start to pay higher-rate tax. The couple do not have the opportunity to

make elections to share or give away the tax credit.

Where a partner&#39s right to the allowance exceeds his or her taxable

income, he or she can elect to transfer the unused portion to the other


An absurdity occurs where each of the couple has identical total income

for the tax year. This could easily occur – consider a couple who are in

business together as equal partners. Another example might be where neither

of the couple receives earned inc ome and their savings are all held in

joint names.

In both these circumstances, neither of them will have a right to the tax

credit unless they make an election that one of them be treated as the

lower earner.

As you can see, the introduction of children&#39s tax credit is yet another

example of how important it is to ensure that the most suitable person

holds particular investments.

Where you are advising couples with children, life insurance bonds will

assume an even greater importance in tax planning than is already the case.


&#39Cat loans will prove poor value&#39

Nearly half of mortgage brokers believe Catmarked mortgages will prove tobe poor value for consumers, according to the latest findings from TMBResearch.The survey, commissioned by packager The Mortgage Business, shows brokersare seriously concerned that the introduction of Catmarked mortgages willhave a detrimental effect on sales.The news follows indus trywide concern that Catmarked mortgages may appearto […]

&#39Drawdown is being missold on small funds&#39

The Income Drawdown Advisory Bureau has voiced fears that drawdownproducts are being missold to clients who do not have a pension fund withthe necessary size.The bureau believes the minimum fund necessary for a drawdown product is£215,000. It warns that products are being sold to those with much lesscapital.An ABI report estimates that 16,000 policies were […]

Debtor&#39s prison

Flexible mortgages, the new flavour of the month, are being offered by somany lenders now that it is possible that about 25 per cent of allmortgages and remortgages are now “flexible”.That flexibility usually includes features such as the ability to takepayment holidays, the availability of extra borrowing above the initialmortgage amount secured on the property, […]

CGU thinks young at heart with a day at the seaside

CGU Life has based its latest TV pension ad in Southend-on-Sea. The adfocuses on young couple going about their everyday lives with the theme ofmaintaining your lifestyle in retirement.CGU says it picked the Essex coastal resort not just because it representsthe archetypal English town but because it is also “a wonderfullypicturesque place”.The company used real-life […]

Flexible reversionary trusts and estate planning

The suitability of different estate planning solutions will depend on the individual’s own circumstances, needs and objectives. When considering the different solutions available there is a trade-off between inheritance tax (IHT) efficiency and access. Overall a flexible reversionary trust provides a greater level of flexibility than a discounted gift trust and can offer individuals a […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm