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TONY WICKENDEN&#39S BUDGET tax planning

This Budget was certainly one with few surprises. So, I am going to take a more oblique view of what some of the changes might mean and what action might be profitable for UK taxpayers in a few selected areas.

As was widely expected, the amount of this credit, which takes effect for the first time on April 6, 2001, will be increased above the level at which it was first proposed to give a tax cut of up to £520 a year.

The CTC is payable to families – single parents, married couples or unmarried couples living together – where at least one child under the age of 16 is that of the claimant and living with the claimant or maintained at the expense of the claimant.

The relief will be means-tested and progressively withdrawn if the claimant is liable to higher-rate income tax, that is, they have taxable income of at least £29,400 from April 6, 2001, which equates to total income of £33,935 before deduction of the standard personal allowance of £4,535.

Relief is then withdrawn at a rate of £1 of credit per £15 of income subject to higher-rate tax. This means that, where income subject to tax exceeds £37,200, no CTC will be available (£37,200 –

£29,400 = £7,800. £7,800/£15 = £520).

Where the child lives with two persons, each person is termed a partner.

Households where one partner&#39s income which is subject to tax exceeds £37,200 at current rates will not qualify. Yet where each partner earns just under the limit, the relief will be due in full even where the joint income is much higher than the £37,200 limit.

This is because the legislation requires the higher-earning partner to claim. Therefore, where both partners have income subject to tax in excess of £29,400, the one with the higher income will claim. If neither partner has income in excess of £29,400 subject to income tax, they can elect to share the credit equally or allocate the whole to one of them.

Where there is a chargeable event gain for income tax purposes from the encashment of a non-qualifying life insurance policy, for example, a capital investment bond, a trap could catch the CTC in the same way as for age allowance. Top-slicing relief does not apply, hence the entire chargeable event gain will be treated as income. This will be disadvantageous where a basic-rate taxpayer is taken into the higher-rate band by the chargeable event gain.

Another worrying conclusion that can be drawn is that, where the credit is cut back by the claimant&#39s income exceeding the higher-rate threshold, the effective rate of tax suffered by virtue of tax and loss of credit can exceed 50 per cent. This means any qualifying expenditure, such as an allowable pension contribution, that can reduce income falling between £29,400 and £37,200 would both secure tax relief and reinstate the credit, so tax relief at an effective rate of over 50 per cent could be secured.

In my regular column in next week&#39s Money Marketing, I will look at changes in the areas of inheritance tax, capital gains tax and life policy taxation.

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