27th Jun 2012
The following tax strategies apply to you if you have a spouse or civil partner. To a lesser extent, there are some tax strategies that may apply for unmarried persons who are cohabiting.
The general rule is that there is no income tax, capital gains tax (CGT) or inheritance tax (IHT) payable when passing assets to a spouse or civil partner. The spouse can therefore be used to reduce a higher taxpaying partner’s tax liability, and to create more disposable income.
Each person has the following personal allowances in 2011-12. The figures in brackets are for 2012-13.
Basic personal allowance: £7,475 (2012-13 this is £8,105)
Age 65-74: £9,940 (10,500)
Age 75+ : 310,090 (£10,660)
If taxable income is over £24,000 (£25,400) then investors lose £1 for every £2 of age allowance down to the basic personal allowance; and at £100,000+ of taxable income, the personal allowance is lost. Those earning up to £114,950 will pay tax at an effective rate of 60% on part of their income because of the loss of the personal allowance.
Capital gains tax allowance: £10,600 (frozen)
Savings rate: 10%: £0-£2,560 (£2,710)
Basic rate 20%: £0-£35,000 (£34,370)
Higher rate 40%: £35,001 (34,371) - £150,000
Additional rate 50%: over £150,000
Dividends are taxed at 10%, 32.5% (higher rate) and 42.5% (additional rate)
Capital gains tax
Basic rate: 18%
Higher rate: 28%
From the above, it can be seen that each person has a personal allowance and a CGT annual allowance (even if they are non-taxpayers), and that tax rates differ substantially the higher the level of earnings.
Ensure that you use all of your allowances and exemptions. If a higher rate taxpayer, for example, take capital gains as income to utilise your CGT exemption of up to £10,600 (see ’10 Tax-Saving Tips!’ in this edition of Tax Insider).
Consider the outright transfer of income-producing assets to a lower taxed spouse. The income then arises in the hands of that spouse who has allowances to be used. A 40% taxpayer could reduce tax to nil using this strategy, up to the level of the allowances. There are generally no income tax, CGT or IHT implications with this strategy. In fact, you could reduce your taxable estate for IHT purposes through involving your spouse in this way.
If seeking a lower CGT rate pass assets to a spouse who cashes them in. Their CGT rate as a basic rate taxpayer (or non-taxpayer) is 18% and an additional CGT allowance of £10,600 is available. Do not sell one asset and immediately repurchase it – you must wait 30 days, unless you buy a SIPP or ISA.
Where investments or assets are transferred between spouse, they must be UK resident and domiciled and living together. The transfer must be outright and unconditional. If you are a 50% taxpayer and transfer assets to a non-taxpaying spouse you will save 50% on interest income and 32.5% on dividend income – this is equally beneficial if a 40% taxpayer is making the transfer, or a 50% one transferring to a 40% one.
Transfer income-producing assets between a couple to avoid the age allowance trap limit (£24,000 in 2011-12) (£25,400). Above that limit you lose a personal allowance if above age 65 – it reduces down to the basic allowance on a £1 for £2 basis. Also use non-income producing investments such as investment bonds where withdrawals are non-taxable. If surrendering parts of an investment bond, assign the segment to the lower taxpaying spouse first to avoid the higher tax rates.
If taxable earnings are over £100,000 you lose your personal allowance. Make assets transfers to the spouse (or perhaps a pension contribution) to bring your earnings below this level. This will save your personal allowance and reduce your tax. Reinvest in tax-free income producing investments, or investments that do not produce income.
Employ your spouse or contract with the spouse for home based work. In this way what you pay out is deductible for you, and you can therefore reduce your taxable income. Your spouse may be a non-taxpayer or a lower rate taxpayer and considerable savings can be made. You could pay up to approximately £600 per month with no tax and NICs payable. This is a way to get the housekeeping deductible! Ensure though that your spouse is gainfully employed in administration or assisting with clients etc.
Practical Tip :
The above are some simple yet most effective strategies to reduce tax and redistribute assets. Billions of pounds are lost each year through not utilising available exemptions and allowances. Talk with your tax adviser to see if your circumstances can bring about a reduction in your tax payment.