In the first of our Taxes Made Easy series, we consider tax matters for couples.
Spouses are taxed as independent persons, each of whom is responsible for their own tax affairs. The phrase ‘spouse’ whenever used in this guide includes a registered civil partner. For spouses, there is no aggregation of income, no sharing of the tax bands and except in limited circumstances detailed later in this guide, the personal allowance may not be transferred from one spouse to the other.
Minimising the tax bill
However tax can be minimised if spouses equalise, as far as possible, their income so
that personal allowances, savings allowance (SA) and dividend allowance (DA) are fully
utilised and higher/additional rates of tax are minimised.
Example: In 2019/20 Ian and Angela have savings income of £50,000, dividend income of £50,000 and no other income. If this is split equally between them, the total tax bill for the couple is £6,250. If only one spouse has an income of £100,000 and the other has nothing, the total tax bill leaps to £22,000 - an additional £15,750!
Tax Tip: If you are feeling charitable, remember that a donation to charity under the Gift Aid scheme benefits from tax relief. It makes sense for a higher rate/additional rate
taxpayer spouse to make such donations so that they can benefit from the extra tax relief. Alternatively, in some circumstances, donations can be carried back to attract tax
relief in the previous tax year.
Tax breaks for spouses
Married couples and civil partners may be eligible for a Marriage Allowance (MA).
The MA enables spouses to transfer a fixed amount of their personal allowance to their
spouse. The option to transfer is not available to unmarried couples.
The option to transfer is available to couples where neither pays tax at the higher or
additional rate. If eligible, one partner will be able to transfer 10% of their personal
allowance to their partner which means £1,250 for the 2019/20 tax year.
For those couples where one person does not use all of their personal allowance, the benefit will be up to £250 (20% of £1,250).
Jointly owned assets
Married couples will often own assets in some form of joint ownership. If they do not then it may be advantageous, for tax purposes, for transfers to be made to ensure joint ownership.
This can have benefits for income tax, CGT and even inheritance tax.
Tax Planning: If you and your spouse are both involved in running a business, income can be equalised if you are equal partners or equal shareholders. Alternatively, if only one of you is involved, the other could be employed in a small capacity, drawing a salary to use up their personal allowance.
Where assets are owned in joint names, any income is deemed to be shared equally
between the spouses. If the actual ownership shares are unequal, income is still deemed to be split equally unless an election is made to split the income in the same proportion as the ownership of the asset.
This does not apply to shares in close companies (almost all small, private, family
owned companies will be close companies) where income is always split in the same
proportion as the shares are owned.
Example: A buy to let property is owned three quarters by Helen and one quarter by her husband Mark. If no election is made the net rental income on which tax is payable will be split 50:50. If an election is made the income will be split 75:25. A choice can be made according to which is the most desirable when other income of the spouses is taken into account.
Capital gains tax
Independent taxation also applies to CGT. Each spouse is entitled to take advantage of the annual exemption of £12,000 before any CGT has to be paid.
This is advantageous where assets are held jointly and then sold as each spouse can use their annual exemption to save tax. The transfer of assets between spouses is
neutral for CGT. This is sometimes done shortly before assets are sold, to minimise tax. Advice should be sought before undertaking such transactions to ensure that all tax aspects have been considered.
What about unmarried partners?
It still pays to equalise income as much as possible, as income tax will be minimised.
However, transfers of assets may be liable to CGT and, if substantial, could also lead to an inheritance tax liability. It is vital for unmarried couples to each make a Will if they wish to benefit from each other’s estate at death.
Remember all the special rules for married couples apply equally to same-sex couples who have entered into a registered civil partnership or marriage.
A word of warning
Transferring assets or interests in a business between husband and wife may attract the
interest of HMRC especially where it is obvious that it has been done primarily for tax saving purposes. Transfer of ownership of an asset must be real and complete, with no right of return and no right to the income on the asset given up.
If a non-working spouse is given shares in an otherwise one-person, private company,
HMRC may, in some circumstances, seek to tax the working spouse on all of the dividends under what is known as the ‘settlements legislation’. You may want to consider obtaining advice from us before entering into this type of arrangement.
Checklist for couples
- Try to equalise your income
- Consider placing assets in joint names
- If you have children consider making use of their personal allowances
For more information or advice on the above, please don't hesitate to contact us.