David Wilson of Barnett & Turner mentions four ways married couples and civil partners can reduce their tax burden If you’re married or have entered into a civil partnership, you certainly benefit from tax breaks that other people can’t claim. In this short discussion of family tax planning, we’ll use the word ‘spouse’ as a generic to cover husbands, wives and civil partners.
Essentially you are looking to make sure that you use all available exemptions and allowances and – where appropriate have income or capital gains in the hands of a spouse, where it may be taxed at the lowest possible rate. Some examples might include:
Registering buy-to-let property in the name of the spouse with the lowest income tax rate. Properties may be owned entirely by one spouse, as joint tenants, or as tenants in common in unequal shares. The underlying ownership determines the division of the property income. Property owned as joint tenants is divided equally, whereas property owned in differing shares – as tenants in common – is divided equally (or, upon a specific election submitted to HMRC, in accordance with the underlying ownership). In this way, the property income can be altered to suit the circumstances of the couple.
Transferring ownership of all or part of the property to the other spouse.
While it may be advantageous for one spouse to own a buy-to-let property from the perspective of income tax, it may not be so good from a capital gains tax (CGT) perspective. Prior to the sale of a property at a gain, it may be a smart idea to transfer ownership of all or part of the property to the other spouse where, for example, that spouse has significant capital losses available to offset against the gain, or has an unused CGT exemption. The ability to transfer assets between spouses without incurring any CGT liability is another tax break which is available only to married couples or civil partners.
Paying a salary or gifting shares to a non-working spouse
An individual running a business can save significant income tax by employing their spouse on a salary, or gifting shares upon which a dividend is paid. The salary payment may also possibly enhance the spouse’s state pension entitlement. These arrangements however can come under close scrutiny from HMRC. Any salary paid needs to be commercially justifiable, taking into account the duties of the employment, and must be paid. Any gifts of shares between spouses must constitute more than just an entitlement to income. It’s important to ensure that these arrangements are not open to challenge by the Revenue and are not caught under the settlement rules or even the employment related securities legislation for example, so make sure to talk to your accountant about them.
Putting savings into the name of the spouse with the lowest tax rate
By far the most common example of switching income between spouses is to put savings into the name of the spouse with the lowest tax rate. You can reduce or avoid income tax on any interest generated. With the introduction of the personal savings allowance and the 0% starting rate applicable to interest in certain circumstances, income tax savings on interest received can now be significant.
If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at email@example.com