Married couples and civil partners – arranging division of income to minimise tax rates

This article was written by Steve Connington, Tax Consultant at Page Kirk. It was published in October’s issue of the The Nottingham Post’s Business Monthly.

During my 40 years working in the field of personal taxation it is clear that successive governments have sought to promote the institution of marriage and family values. A married couple, and more recently civil partners, enjoy certain tax breaks not available to those who choose not to tie the knot.

This article attempts to highlight some of the opportunities that exist for married couples and civil partners to reduce their liabilities to taxation. Throughout the article my references to spouse also apply to a civil partner.

The rationale behind most family tax planning is to ensure that all available exemptions and allowances are utilised and, where possible, shift income or capital gains into the hands of the spouse where it will be taxed at the lowest possible rate. Some examples of methods by which income and gains can be shifted between spouses are as follows:

• Registering buy to let property in the name of the spouse with the lowest 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 either 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.

• Whilst it may be advantageous for one spouse to own the buy to let property from the perspective of income tax, it may not be so for capital gains tax (CGT). Prior to the sale of a property at a gain it may be advantageous 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 unutilised 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.

• For a spouse running a business, paying the non-working spouse a salary, or gifting shares upon which a dividend is paid can save significant income tax and, in the case of a salary, possibly enhance the spouse’s state pension entitlement. These arrangements come under close scrutiny by 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. Professional advice is recommended to ensure that these arrangements are not open to challenge by HMRC.

• By far the most common example of switching income between spouses is to put savings into the name of the spouse with the lowest tax rate, whereby income tax on any interest generated is reduced or avoided.  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.

The above is a brief overview of the more common methods of ensuring that income and gains are taxed on the spouse with the lowest tax rate and is not intended to be exhaustive. We have many years’ experience of dealing with personal and business tax issues at Page Kirk LLP and offer a free one hour consultation if you wish to discuss your current or intended business or personal circumstances with us.