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How a couple can make more tax-efficient use of the allowances and exemptions available to them, by Tony Granger for Tax Insider.

General Rule

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 or Inheritance Tax payable when passing assets to a spouse or civil partner. The spouse can therefore be used to reduce a higher tax paying partner’s tax liability, and to create more disposable income.

Personal Allowances, Rates & Exemptions

Each person has the following tax-free personal allowances in 2012-13. 

Basic personal allowance: £8,105
Age 65-74: £10,500
Age 75+ : £10,660

If taxable income is over £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 from £100,000 up to £116,210 will pay tax at 60% because of the loss of the personal allowance.

Capital gains tax allowance: £10,600 (frozen)

Tax Rates
Savings rate: 10%: £2,710
Basic rate 20%: £0-£34,370
Higher rate 40%: £34,371 - £150,000

Additional rate 50%: over £150,000

Capital gains tax rates: basic rate: 18% and higher rates: 28%
Dividends are taxed at 10%, 32.5% (higher rate) and 42.5% (additional rate)

From the above, it can be seen that each person has a Personal Allowance, a Capital Gains Tax Annual Exemption (even if they are non taxpayers) and tax rates differ substantially the higher the level of earnings. 

Strategy 1

Ensure that you use all of your allowances and exemptions. If a higher rate taxpayer, for example, take capital gains instead of income to utilise your CGT exemption of up to £10,600.

Strategy 2

Consider the 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 basically no Income Tax, CGT or IHT  implications with this strategy. In fact, you could reduce your taxable estate for IHT purposes through using your spouse in this way.

Strategy 3

If seeking a lower Capital Gains Tax rate, pass assets to a spouse who may later cash them in. Their CGT rate is 18% and an additional Annual Exemption 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.

Strategy 4

Where investments or assets are transferred between spouses, they must be UK resident and domiciled and living together. The transfer must be outright and unconditional. If a 50% taxpayer and you transfer assets to a non tax-paying spouse you will save 50% on interest income and 32.5% on dividend income – this is also beneficial if a 40% taxpayer making the transfer, or a 50% one transferring to a 40% one.

Strategy 5

Transfer income-producing assets between a couple to avoid the age allowance trap limit of £25,400 referred to earlier. Above that limit, you lose a personal allowance if above age 65 – it reduces down to the basic allowance on a £1 allowance for £2 increase in income basis. Also use non income producing investments such as investment bonds where withdrawals are potentially non taxable. If surrendering parts of an investment bond, assign the segment to the lower tax paying spouse first to avoid the higher tax rates.

Strategy 6

If taxable earnings are over £100,000 you start to lose your personal allowance.  Make asset transfers to the spouse or 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.

Strategy 7

Employ your spouse or contract with the spouse for home based work. In this way what you pay out is deductible to you and you reduce your taxable income. Your spouse may be a non taxpayer or a lower rated tax payer and considerable savings can be made. You could pay up to approximately £600 per month with no tax and NICs payable. Ensure though that your spouse is gainfully employing in administration or assisting with clients, etc.

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.

About The Author

Tax Insider publishes monthly newsletters and reports for everyone with an interest in responsible tax saving, including professional advisers, business owners, entrepreneurs, property investors and other UK taxpayers.

For general taxpayers visit www.taxinsider.co.uk 

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