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, shift income or capital gains into the hands of a spouse, where it will be taxed at the lowest possible rate. Some examples might include:
Registering buy-to-let property in the name of the spouse with the lower 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 beneficial 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
A spouse running a business can save significant income tax by paying the non-working spouse 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 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 HMRC, so make sure to talk to your accountant about them.
Putting savings into the name of the spouse with the lower 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 lower 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.