Tax Guru: tie the knot and pay less tax - The tax system already favours the institution of marriage – and the Coalition may deliver further tax breaks in the Budget .
It is hard to believe, but barely 20 years ago married women were not treated as real people by the tax system, merely adjuncts to their husbands.
It was the husband's responsibility to complete a tax return showing income for both himself and his wife, and she was obliged to provide him with the information to do so. The law was brought kicking and screaming into the 20th century on April 5 1990.
Norman Lamont, who, as chancellor, piloted independent taxation, did so with the following words to Parliament: "Independent taxation is bound to mean some couples will transfer assets between them with the result that their total tax bill will be reduced. This is an inevitable and acceptable consequence of taxing husbands and wives separately. We expect income splitting."
Once married, Prince William and Kate Middleton will be able to transfer assets between them tax free
This gave a blessing for couples to save tax by relatively straightforward planning. The rules specifically allow spouses, and civil partners, to transfer assets between themselves without it being treated as a disposal for capital gains tax or inheritance tax, provided the recipient is UK domiciled.
The starting point is to ensure both spouses use up their income tax personal allowances. From April, this will be £7,475 for people up to 65, £9,940 for pensioners between 65 and 74 and £10,090 for those aged 75 and over. If one spouse is working and one is at home with the children, it makes sense for investments to be held in the name of the non-working spouse. This will apply to bank and building society deposits in particular and any property they own that is let.
From next month the amount of income you can earn before you become a higher-rate taxpayer drops from £43,875 to £42,475, but there will be a £35,000 band available to each spouse with only 20pc income tax applying. So, if you have one spouse paying higher-rate tax and the other not earning or a basic-rate taxpayer, it makes sense for investments to be transferred to maximise the income taxed at basic rate. In this example, shares come into the picture because dividends can suffer higher-rate tax, effectively at 25pc of the cash dividend.
What applies to income applies similarly to capital gains, because everybody has an annual capital gains exemption, currently £10,100. If sitting on shares with a profit of £20,000, it may make sense to give half to your spouse before they are sold so you use both annual capital gains tax exemptions.
How about single premium insurance policies, often referred to as bonds? The tax rules are complicated, but when you finally cash in the bond or draw more than the 5pc per annum allowed, the excess will be subject to income tax if you are a higher-rate taxpayer. Assigning a policy to a basic-rate taxpaying spouse can save a big tax bill and if the proceeds push them into higher rates of tax, ''top slicing relief'' is available to reduce the liability.
A particular problem can affect pensioners. This is because they can pay a higher tax rate if their income exceeds the age-related allowance limit which, for next year, will be £24,000. It means that a pensioner earning between £24,000 and £28,930, (£29,230 at age 75 and over), will pay an effective tax rate of 30pc on their income because of the way their personal allowances are reduced.
The same principle applies if one spouse is earning between £100,000 and £114,950, because here the effective tax rate becomes 60pc as personal allowances are phased out altogether.
You need to pay particular attention to joint bank accounts. HMRC will treat the income from these as equal unless steps have been taken legally to change the basis on which the account is held. Joint accounts are useful for older couples because if one dies, the other one can still access it, whereas individual accounts are only accessible once probate is granted. So, if you want a joint account, but for your spouse, for example, to have 90pc of the income, you should have a deed to evidence that the legal basis of ownership has changed. This new basis can then be used for tax purposes on completion of HMRC form 17.
Avoid the temptation to give an asset to your spouse on the understanding that, if you want it back, it will be returned, as Norman Lamont made clear: "Provided that the gift of assets between husband and wife is free from conditions and is a complete and irrevocable transfer of the underlying capital as well as the income, we see absolutely no case for imposing a tax penalty on the income of those assets."
One of the disadvantages of marriage is that a couple is only allowed one principal private residence CGT exemption at a time, although, as I explained two weeks ago, it is possible to have a degree of doubling up using the election and the three-year rule. On the whole, however, the tax system favours marriage and it is thought that the coalition Government is generally favourable to further improvements, some of which may be announced in the Budget on March 23. ( telegraph.co.uk )
It is hard to believe, but barely 20 years ago married women were not treated as real people by the tax system, merely adjuncts to their husbands.
It was the husband's responsibility to complete a tax return showing income for both himself and his wife, and she was obliged to provide him with the information to do so. The law was brought kicking and screaming into the 20th century on April 5 1990.
Norman Lamont, who, as chancellor, piloted independent taxation, did so with the following words to Parliament: "Independent taxation is bound to mean some couples will transfer assets between them with the result that their total tax bill will be reduced. This is an inevitable and acceptable consequence of taxing husbands and wives separately. We expect income splitting."
Once married, Prince William and Kate Middleton will be able to transfer assets between them tax free
This gave a blessing for couples to save tax by relatively straightforward planning. The rules specifically allow spouses, and civil partners, to transfer assets between themselves without it being treated as a disposal for capital gains tax or inheritance tax, provided the recipient is UK domiciled.
The starting point is to ensure both spouses use up their income tax personal allowances. From April, this will be £7,475 for people up to 65, £9,940 for pensioners between 65 and 74 and £10,090 for those aged 75 and over. If one spouse is working and one is at home with the children, it makes sense for investments to be held in the name of the non-working spouse. This will apply to bank and building society deposits in particular and any property they own that is let.
From next month the amount of income you can earn before you become a higher-rate taxpayer drops from £43,875 to £42,475, but there will be a £35,000 band available to each spouse with only 20pc income tax applying. So, if you have one spouse paying higher-rate tax and the other not earning or a basic-rate taxpayer, it makes sense for investments to be transferred to maximise the income taxed at basic rate. In this example, shares come into the picture because dividends can suffer higher-rate tax, effectively at 25pc of the cash dividend.
What applies to income applies similarly to capital gains, because everybody has an annual capital gains exemption, currently £10,100. If sitting on shares with a profit of £20,000, it may make sense to give half to your spouse before they are sold so you use both annual capital gains tax exemptions.
How about single premium insurance policies, often referred to as bonds? The tax rules are complicated, but when you finally cash in the bond or draw more than the 5pc per annum allowed, the excess will be subject to income tax if you are a higher-rate taxpayer. Assigning a policy to a basic-rate taxpaying spouse can save a big tax bill and if the proceeds push them into higher rates of tax, ''top slicing relief'' is available to reduce the liability.
A particular problem can affect pensioners. This is because they can pay a higher tax rate if their income exceeds the age-related allowance limit which, for next year, will be £24,000. It means that a pensioner earning between £24,000 and £28,930, (£29,230 at age 75 and over), will pay an effective tax rate of 30pc on their income because of the way their personal allowances are reduced.
The same principle applies if one spouse is earning between £100,000 and £114,950, because here the effective tax rate becomes 60pc as personal allowances are phased out altogether.
You need to pay particular attention to joint bank accounts. HMRC will treat the income from these as equal unless steps have been taken legally to change the basis on which the account is held. Joint accounts are useful for older couples because if one dies, the other one can still access it, whereas individual accounts are only accessible once probate is granted. So, if you want a joint account, but for your spouse, for example, to have 90pc of the income, you should have a deed to evidence that the legal basis of ownership has changed. This new basis can then be used for tax purposes on completion of HMRC form 17.
Avoid the temptation to give an asset to your spouse on the understanding that, if you want it back, it will be returned, as Norman Lamont made clear: "Provided that the gift of assets between husband and wife is free from conditions and is a complete and irrevocable transfer of the underlying capital as well as the income, we see absolutely no case for imposing a tax penalty on the income of those assets."
One of the disadvantages of marriage is that a couple is only allowed one principal private residence CGT exemption at a time, although, as I explained two weeks ago, it is possible to have a degree of doubling up using the election and the three-year rule. On the whole, however, the tax system favours marriage and it is thought that the coalition Government is generally favourable to further improvements, some of which may be announced in the Budget on March 23. ( telegraph.co.uk )
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