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As we head into Summer, a new wedding season is upon us. It seems therefore a fitting time to recap on some of the tax breaks and planning ideas available to married (and civil partnership) couples.
The most recent development in this area is the ability to transfer some of the tax free personal allowance to a spouse, which came into force from 6 April 2015.
There are however several other tried and tested areas of tax planning that can be considered, a few of which we’ve noted below. For example, gifting assets (such as property or shares) to lower earning spouses.
Transferable Personal Allowance
From 6 April 2015, if your income is less than the personal allowance (£10,600 for 2015/16) you can transfer up to 10% of your personal allowance to your spouse provided they don’t pay tax above the basic rate (eg where they have income of less than £42,385 for 2015/16). This could save around £212 in tax. However, couples who can claim the married couple’s allowance will not be entitled to make this transfer.
Married Couple’s Allowance
Where one spouse was born before 5 April 1935, the couple can claim a married couple’s allowance, saving the couple up to £835 for 2015/16.
If the marriage took place before 5 December 2005 the allowance is given to the husband although it is possible to elect for the allowance (or part thereof) to be transferred to the wife. For marriages after 5 December 2005 the allowance is given to the higher earning spouse.
Transfer of Assets
Husbands and wives are taxed separately and each is therefore entitled to their own income tax personal allowance and capital gains tax annual exemption. They’re also entitled to their own basic rate band, where lower rates of tax apply. It can therefore be beneficial to gift assets to a lower earning spouse to utilise these tax free amounts and lower rates. For instance:
From 6 April 2015, savings income up to £5,000 is taxed at 0% where the individual has little other taxable income. Where a husband doesn’t have any taxable income but his wife does, it can therefore be beneficial to transfer savings accounts into his name to utilise this 0% rate. Any income tax which has been deducted by the bank at source can then be reclaimed from HMRC.
Where a husband owns 100% of a company he can chose to gift shares to his wife (for this example, assume 20%). The wife would then own the shares outright (no joint ownership) and be taxed on 20% of the dividends and gains arising from the shares, thereby utilising her personal allowance and lower rates of tax. The downside might be however that she would also be entitled to 20% of the voting rights in the company!
A self employed individual can also bring their spouse into the business by setting up a partnership and splitting income and assets between them in their chosen proportions. It will however be important to ensure the necessary documentary evidence is in place to support the income split and the existence of the partnership (eg a formal partnership agreement and separate partnership bank account).
It can also be worth gifting capital assets, such as rented property between spouses before sale in order to utilise capital gains tax annual exemptions.
Gifts of assets between spouses are exempt from:
• Capital Gains tax
• Income tax on employment related securities
• Stamp duty on shares
• Stamp Duty Land Tax/Land & Buildings Transaction Tax on land and property
Care does need to be taken that HMRC don’t see the transfer of the assets as a sham and the gift must be ‘no strings attached’ or anti-avoidance rules will take effect.
Each spouse is also treated independently for inheritance tax purposes. This means that each spouse is entitled to their own exemptions and reliefs.
For instance, an individual can make a wedding gift to their son/daughter of £5,000 without any inheritance tax implications. As each person is treated independently, a married couple could therefore double the amount to give a wedding gift of up to £10,000.
Transfers between spouses are completely exempt from IHT unless the recipient spouse is domiciled outside the UK, where the exempt amount is restricted.
If an election is made, it is also possible for all or part of an inheritance tax nil rate band (currently £325,000 per person) which has not been used on a death of one spouse to be transferred to the surviving spouse.
Enormous savings can therefore be made by sensible drafting of wills in order to use nil rate bands.
If you would like further information regarding any of the above please contact firstname.lastname@example.org.