It is difficult to believe that as recently as 1990 married women were treated by our tax system as little more than financial appendages of their husbands. My wife was required by law to give me details of her income so that I could include it on my tax return.
Throughout her time as prime minister Margaret Thatcher had to do the same.
When independent taxation was eventually introduced by Nigel Lawson, however, it not only represented a belated lurch into the modern world but also provided a number of tax planning opportunities.
The first advantage of the current rules is that with a married couple, or civil partnership, you both have your own tax allowances. That includes the personal income tax allowance of £12,500, a savings allowance of £1,000, a dividend allowance of £2,000 and a capital gains tax (CGT) allowance of £12,000 each.
Personal tax bands also work independently, so each spouse can have taxable income after allowances of £37,500 before 40pc tax rates apply.
At the same time transfers of assets between couples is free of tax in almost all circumstances. It therefore makes good sense to ensure as far as possible that shares, unit trusts, bank and building society accounts and investment properties are transferred and held in the way that maximises the use of these allowances and lower tax bands.
Suppose someone earns £50,000 a year, has annual dividends on shares of £5,000, bank interest of £5,000 and will be making a capital gains of £24,000 this year on share sales.
They will be paying income tax at 32.5pc on £3,000 of the dividends, at 40pc on £4,000 of bank interest and CGT at 20pc on £12,000 – a total of £4,975. If half the shares and all the savings accounts are transferred to their spouse, who has no income, the tax will be limited to 32.5pc on £500 of dividends, just £162.50.
Clever financial planning could save that couple more than £4,000 in tax.
When he first proposed independent taxation, Nigel Lawson intended that both personal allowances should be freely transferrable. Sadly he was overruled at the time, although a limited transfer of allowances has subsequently been introduced. A spouse who has income below £12,500 this year can transfer £1,250 to their partner if they are a basic-rate taxpayer, giving a saving of £250. Not as generous as originally planned but better than nothing.
The capital gains allowance is potentially much more valuable because you can transfer an asset such as shares to your spouse together with any capital gain already built up. This means that you do not have to carry out detailed planning in advance, just transfer the shares across before they are sold, thereby saving up to £2,400 each year.
With property the same applies but be careful if there is a mortgage involved because this can trigger stamp duty land tax. If you want to do this by a declaration of trust rather than a legal transfer a solicitor can usually arrange the required document.
It is not widely known that you can achieve a similar result with bonds. When these are encashed the gain is subject to higher-rate income tax (less basic rate if they are UK based) but with the benefit of some complicated top slicing rules. Assigning a policy from a higher-rate taxpayer to a spouse who does not pay tax or is a basic-rate taxpayer can often avoid income tax altogether.
The bizarre rules for claiming child benefit can provide another reason for transferring income-producing assets. This is because the benefit is progressively clawed back in tax where one spouse has income over £50,000 per year rather than with reference to their combined incomes. Ensuring that the lower-earning spouse owns the assets may reduce or prevent this tax clawback.
Care is required, however, where couples own property jointly. There is a presumption in the rules that the income is shared equally. If the ownership is unequal, possibly under a declaration of trust, it is important that you complete form 17 and submit that to HMRC early because the unequal split for tax purposes only works from then.
There are a couple of circumstances I should mention where spouse transfers are not entirely tax free. In most cases there is a complete exemption from inheritance tax, but this exemption can be limited to £325,000 if the recipient is not UK-domiciled.
There can also be a problem where the assets are securities, such as government gilts, corporate bonds, loan notes and local authority bonds. A complex piece of legislation known as the accrued income scheme can trigger an income tax liability when these are sold or gifted. For no apparent reason, parliament omitted to put in an exemption for transfers between spouses. This can represent a trap for the unwary, particularly where interest is being rolled up before the transfer takes place, because an unexpected tax bill can arrive on interest that you haven’t yet received.
In this column we unapologetically aim to help readers identify ways of saving tax by legal means which may otherwise only be available to those who pay for professional advice. I recognise that this can attract criticism from some observers.
At the same time there is no point in taking part in a complex scheme that you know will antagonise the tax authorities and is likely to lead to a costly dispute. In the context of spouse tax planning it is therefore helpful to keep in mind the words of Norman Lamont, speaking on the subject in Parliament in 1989 shortly before he became chancellor.
“Independent taxation is bound to mean that 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”.
In my view you should not feel reticent about taking sensible steps to save tax. I believe we are entitled to play the hand we are dealt given that the Government holds all the aces by setting the rules. After all, tax avoidance is the second-oldest profession.
The first recorded example of it was from the roman poet Virgil (70-19 BC) who buried his pet fly on a plot of valuable land he owned, declared it a cemetery, and thereby avoided land tax.
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