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The generation game

Effective family financial planning allows investors to pass wealth on to children while leaving ample to live on

I have heard of Financial Planning Week, which began on November 22. Can you tell me what is the most effective way to financially plan for my family?

You have told me you have pension, earnings and investment income totalling £21,634 for this tax year. As you are retired and over the age of 65, you are able to claim higher personal allowances of £9,490, making you a 20 per cent basic-rate taxpayer.

As we have done for previous years, I will review your chargeable assets and advise which ones can be sold before April 6 to maximise the benefit of your capital gains tax annual exemption, currently at £10,100.

It may well be best advice that you repurchase some of your wife’s assets or investments to maximise your own annual capital gains tax exemption in the future, which you are not doing currently.

You ask about family financial planning and you have told me that you have children and grandchildren.

From the day a baby is born, he or she has full personal tax allowances. If the parents give money to the child, it will be taxed on the parent while the child is not married and under 18 years of age under the anti-avoidance provisions.

As you are the grandparent, this does not apply to gifts you make and you could simply give the grandchild capital or income of an amount below their personal allowances, which means that no income tax or capital gains is immediately due, although the gift may fall within the potentially exempt transfer rules for inheritance tax.

Individuals can make one lifetime gift of up to £3,000 in a tax year, with the ability to carry forward a previous year’s allowance for one year.

In addition, any number of small gifts up to £250 in value will be free of IHT and there is the married gifts exemption of £5,000 to children, £2,500 to grandchildren and £1,000 for others getting married. Gifts to charity are wholly exempt from IHT.

It has been announced recently that junior Isas may launch from 2011. These will replace child trust funds, which can no longer be opened after December 31.

It is thought that there will be an annual allowance of between £3,600 and £5,600 and the allowable investments will be similar to adult Isas. The funds will be held in the child’s name but not accessible until the child is aged 18.

The difference is that for CTFs, a minimum £250 voucher was given by the Government but there are no Government contributions for junior Isas.

We talked already about splitting your investments to benefit from your lower tax band as your wife is still working and is a higherrate taxpayer.

This transfer of income must be unconditional. Any transfer will save 50 per cent – your wife’s rate – in income tax.

Income generated by jointly held assets is automatically taxed in equal shares unless a declaration is made to HM Revenue & Customs stating that the asset is not held in equal shares.

You will need to fill out HMRC form 17 in order to prove this for tax purposes and before any income arises.

To be effective in family estate planning, you should pass down wealth through the generations while leaving enough income, capital and protection for you to live the lifestyle you and your wife wish for in sickness and in health.

Kim North (kim@techandtech. co.uk) is director of Technology & Technical

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