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Child Benefit Charge

Child Benefit Charge

Husband (H) and Wife (W) got divorced last year. They have 2 children who live with mother (W). The divorced husband (H) provides maintenance for W and kids. H earns over £60K. W is in a new relationship with X who lives with W. X earns over £60K. H is also in a new relationship with partner Z. W earns less than £50K.

Who suffers the High Income Child Benefit Charge (and has to fill in a tax return)? What if X also supports his own children and wife from a previous marriage? What if Z earns <£50K and also has children so you have another household partnership of H and Z?

Feedback welcome. Thanks.


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11th Jan 2013 11:19

You need...

... to work through the legislation, but in this situation:

W and X are partners (a household) for the purposes of the legislation.  Since X earns more than £60K, then to the extent that either W or X (or both of them) are receiving Child Benefit (or it is attributed to them - see below), they will suffer the HICB.H and Z are partners for the purposes of the legislation.  Since H earns more than £60K, then to the extent that either H or Z (or both of them) are receiving Child Benefit (or it is attributed to them), they will suffer the HICB.

You look at the highest earner.  If they have an adjusted net income of more than £50K, you then look to see whether they or any person that is their partner is receiving Child Benefit.

There is then a complication if the person receiving the Child Benefit doesn't have the child that's the subject of the claim living with them, where the Child Benefit may be attributed to the person who has the child living with them.  This applies where neither the person receiving the Child Benefit, or someone that is their partner is liable to the HICB.

What if H or X are supporting their former wives and children of the former marriage?  Tough!  There's nothing about the legislation that's the remotest bit fair.

Income for the purposes of HICB is "adjusted net income"; essentially total taxable income less things like gross gift aid payments and gross pension contributions.

Consider using such payments to reduce adjusted net income.

If they're self-employed you could consider incorporating or a sleeping partner arrangement to bring the income down and divert it to the lower earning partner, but such arrangements will probably be caught under the settlements legislation.

Incorporation could be used to defer income until someone comes up with a better and more equitable way of achieving government policy.

Thanks (1)
By cfield
to mrme89
12th Jan 2013 18:23


Steve Kesby wrote:

If they're self-employed you could consider incorporating or a sleeping partner arrangement to bring the income down and divert it to the lower earning partner, but such arrangements will probably be caught under the settlements legislation.

Hi Steve

Would allocating a profit share to a sleeping partner or a dividend to a non-working shareholder really be caught by the settlements legislation if it was an outright gift and that partner was given capital rights? According to BIM72065 and TSEM4215 the answer is No. Of course, that only applies to spouses, and the partners in this case are not married, but I always thought a settlement ordinarily only arises if the beneficiary is a spouse (if the gifts exemption does not apply) or a minor child. I guess that was why s660A was known as "the husband and wife tax"

I know section 625 also creates a settlement if the settlor retains an interest in the property, but would that follow simply because he happens to live with the beneficiary? If she is given voting rights and promised a share of any sale of the business, and there is no arrangement for the shares to revert to the settlor, I don't see a problem.

Thanks (0)
By refs8
11th Jan 2013 12:09

Taxcafe have done a book on the subject and is worth reading, for less than £10 it is worth buying as it covers lots of subject like this. There also email you it when you buy it 

No know this does not answer your question ! But hope it helps

Back to the tax returns

Thanks (0)
13th Jan 2013 13:18



I am referring to the provisions in Ss. 624-628 ITTOIA 2005 where property is settled on another person or persons and the settlor retains an interest in that property.

As you say, the exemption in S.626 where the settlement is not simply a right to income only applies to married couples and civil partners (where the legislation would otherwise automatically apply because of the deeming provision in S.625).

Ignoring the deeming provision in S.625 for a moment, S.624 applies if there is a settlement (during the settlor's lifetime) "from property in which the settlor has an interest".  In the case of an unincorporated business, there's no doubt in my mind that the settling party retains some interest in the assets of the business being settled.

However, S.625 deems the settlor to have an interest if the property can be applied for the benefit of the settlor.  If you're diverting income to the other partner, that income will still be applied in same way that it always was, which will inevitably be for the benefit of both partners to the relationship.

You need to refer to TSEM4200 and HS270, neither of which answers the question though.

You seem sure that the settlements legislation doesn't apply. I'm not.

And next year we've got the General Anti-Abuse Rule to muddy the waters further.

Thanks (0)
By cfield
16th Jan 2013 11:40


Thanks Steve, I see where you're coming from on this. The only reason I felt sure that a settlement would not normally arise on inequitable profit shares in a partnership between non-married couples was that HMRC do not seem to attack this arrangement (to my knowledge).

They don't seem to look beyond the basic principle that partners can allocate profits any way they wish. It's only if property is settled on minor children or trusts that this issue seems to arise.

I may be wrong, but has there ever been a case where non-married couples have been successfully challenged by HMRC with the Settlements legislation over their partnership profit shares?

I see what you're getting at with s624 re the retention of an interest by the settlor in the settled property. I guess it would be difficult to disprove that  he could not still benefit in some way from  the money he has allowed the woman he is living with to take from the partnership.

Even if they arranged their financial affairs so that her profit share was ringfenced and used only for her own benefit, it would be hard to escape the conclusion that the settlor still benefits in not contributing as much to their domestic budget as he would otherwise have done.

Also, on a strict interpretation of the rules, I guess it would not even be necessary for HMRC to prove that he DID benefit, merely that he potentially could. Presumably, however, this would open the door to ANY gift being challenged as a settlement, so there must be some kind of limit on the extent to which this can be applied.

Notwithstanding this interpretation of the legislation, I would have thought it unlikely that HMRC would see ordinary domestic arrangements as the settlor retaining an interest. They seem to be more concerned about the capital rights, as seen with Example 3 on TSEM4200.

Although this deals with a company rather than a partnership, the same reasoning could apply if the partnership assets were not owned in the same proportion as the profit shares.

If it is indeed the case that capital rights are more relevant to the settlor retaining an interest than any possible benefit he may derive from the other partner's profit share, then presumably that could easily be countered by incorporating the business as a limited company and crediting her share of the valuation to her own loan account.

Thanks (0)
15th Jan 2013 10:37


I don't disagree.  I'm unaware of HMRC attacking this sort of thing, but the legislation seems to me to apply, so the risk is there.

HMRC won't seek to apply the legislation unless there's avoidance, and they need to be able to reasonably assert that the property has been or is likely to be applied for the benefit of the settlor.

Remember though that there weren't any recognition of income cases either before the income tax surcharge was introduced for a two year period in the inter war years.

Whilst HMRC's manuals do focus on the settled capital, the legislation does refer to the property and "any related property", which is in turn defined as "income from that property or any other property directly or indirectly representing proceeds of, or income from, that property or income from it."

The planning's there but it should carry a warning in my view.

At the end of the day, in the case someone that would be liable to HICB, but is able divert income to a spouse or partner to avoid it, and then gets caught by HMRC applying the settlements legislation ends up in no worse a position than they would have been without the planning.  They can't get upset if they were warned and properly advised of the various alternatives.

Thanks (0)
By cfield
15th Jan 2013 11:05

Good advice

One of those areas of tax advice that comes with a health warning. Every case would be different of course.

As it only applies to non-married couples, I guess non-availability of the spouse exemption is the main thing to point out, provided it doesn't cause any ructions.

Some guys might not thank you for bringing that up!

Thanks (0)
By brumsub
16th Jan 2013 10:15

Anomalies and advice to clients

Thanks for the replies. I wonder then to what extent we should be actively advising clients in borderline cases? There are some odd situations with this legislation, one so obvious to all that I now dread visiting one client as he goes on and on about the fairness of the new system. Situations that may not be fair:

a couple in a household can earn £50,000 each, £100,000 in total and there is no HICBC whereas a household where only one partner’s ANI exceeds £50,000 is penalised.HICBC where you are penalised in a household that does not include your own children.Unless they opt out, presumably both partners are required to disclose their income – goes against separate taxation of wife’s earnings?If one opts out because he/she thinks they will exceed £50,000, but then finds out this was not the case, any accrued child benefit is lost?The person who receives the child benefit is not necessarily the one who will suffer the HICBC.Filling in a tax return ( and registering for self assessment in October 2013) when one was not required previously.Making a decision as to whether or not to claim child benefit? And getting it wrong? Constantly monitoring income to see if above £50,000?Living separately rather than as a household to preserve child benefit where one partner’s ANI exceeds £50,000.The partner with the lower income (usually the mother), but has ANI above £50,000, decides to claim child benefit so that her partner, who is the higher earner, is hit with the HICBC – so she decides?If you do not know that the mother may be entitled to child benefit (even though she does not claim it) or that she is actually claiming it and she may not tell you? but you are responsible for notifying HMRC if you are subject to the rules!

Have I missed anything else?


Thanks (0)
By cfield
16th Jan 2013 12:05

Yet more anomalies

A very comprehensive list - and I'm sure there must be many others. It just goes to show what a mess the Government is going to get itself into with this new tax.

Other anomalies might be live-in boyfriends who move out (or end the relationship completely) but then find they are still stung for the HICBC. How do you prove when exactly a "household" starts or ends for the purpose of working out this tax?

It will all be retrospective too, so you would need to quote exact dates. Do you have to tell the taxman now if a relationship ends? What if you get back together again? When precisely are you deemed to be "living together". Is it the same criteria as for claiming state benefits?

I don't disagree with the policy aim here. I've always thought it wrong that high earners (or even middle income earners) should get state benefits (with the sole exception of state pension), whatever you choose to call them. Boris Johnson did a very good article on this where he analysed what he and his family had spent theirs on (ski holidays, fine wines, etc).

A better solution would have been to scrap Child Benefit completely and amalgamate it with Child Tax Credit (and Universal Credit when it comes in) so it is only allowed to people below a certain income. But I suppose that would have been political dynamite.

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