Taxation for couples

By Tom Annat

It may surprise some readers to learn that independent taxation was not introduced until 1990. Up until that point, a married woman’s income was considered part of her husband’s for tax purposes. Thankfully, progress has been made since then and husbands and wives are now taxed separately.

The ownership of assets between married couples, civil partners and unmarried couples can bring about some complex tax issues. However, through sensible tax planning, tax savings can be made, and we have considered some of the relevant issues here.

Marriage Allowance

The Marriage Allowance was introduced in April 2015 and applies to married couples as well as civil partnerships. This relief allows up to 10% of the personal allowance to be transferred to the other spouse. For the current year this would be a maximum of £1,260 which could produce a tax saving of up to £252.

The allowance cannot be claimed where either spouse is a higher rate taxpayer. Claims can currently be backdated to the 2018/19 tax year (until 5th April 2023), producing a potential total refund of £968.

Property ownership

Married couples and civil partners

Profits received from investment properties held jointly by married couples or civil partners are automatically taxed on a 50:50 basis. If the joint tenancy has been severed, the beneficial ownership can be changed to allow property to be held in unequal shares. This can allow for a higher proportion of rental profits to be taxed on the spouse with lower income. The savings could be significant where one spouse is a higher rate taxpayer, and the other is a non-taxpayer or basic rate taxpayer.

The joint tenancy must be severed by Deed and notified to HMRC on Form 17.

No marriage or civil partnership

The position for non-married/non civil partnership couples is somewhat flexible. These owners are not confined to a default 50:50 split in the same way married couples are. As such, the profit or loss can be allocated each year in the proportion the owners agree on. However, it should be noted that the share for tax purposes must be the same as the share actually agreed. For example, A spouse showing 90% of profits on their Tax Return must receive 90% of the income and share in 90% of the expenses.

Furnished Holiday Lets (FHL)

It is worth considering the rules on Furnished Holiday Lets (FHLs) because additional tax reliefs can be available for qualifying properties. To qualify as an FHL, these properties must be available to let for at least 210 days in the year and be let to the public for 105 days. There are also limits for longer term lets.

Profits or losses from FHLs can be allocated in any proportion the owners feel appropriate and this can be changed from one year to the next. This is true for FHLs held by married couples, civil partners, or non-married couples.

Other benefits of FHLs are:

• Business Asset Disposal Relief, which provides a 10% rate of CGT (up to a maximum £1m lifetime allowance)
• Business asset rollover relief can be used to roll over a gain on sale into another FHL or qualifying asset
• Income from FHLs is considered relevant earnings for pension contribution purposes
• Full relief for mortgage interest is available
• Capital allowances can be claimed on the initial cost of furniture, fixtures, equipment, and some integral features

Stamp Duty Land Tax – 3% charge

For the purposes of the 3% stamp duty charge, married couples or civil partners are assumed to hold property jointly (even though this may not be the case). Therefore, the purchase of an additional property by either spouse, will incur a 3% surcharge if either spouse satisfies the conditions for the charge to apply.

The 3% surcharge will then apply to the whole transaction.

If the additional property is to be used as a main residence and, the previous residence is sold within 3 years, the 3% surcharge can be recovered. Find out more about Stamp Duty Land Tax

Capital Gains Tax (CGT)

All individuals (including non-residents) qualify for an annual capital gains tax exemption (currently £12,300), unless the remittance basis of taxation has been claimed, in which case the annual exempt amount is forfeited. Capital gains up to this level can be made free of capital gains tax.

A transfer of assets between spouses does not usually give rise to a CGT charge. Assets are deemed to transfer at a value that does not produce a gain or a loss (nil gain-nil loss rule). However, see point below on divorce and separation.

It is worth remembering that capital gains tax follows the beneficial ownership. As such, any change to this could have an impact on any capital gains tax due upon an eventual sale. The beneficial ownership could be altered prior to sale to make use of allowances and exemptions but early planning is crucial. Find out more about CGT

Pensions

Contributions

Pension contributions are limited to the greater of 100% of relevant earnings or £3,600. This may limit the amount of contributions for a non-earning spouse. However, it is possible to make a pension contribution on behalf of somebody else. The person receiving the pension contribution would benefit from a 20% tax uplift when the contribution is made. As such, a net contribution of £2,880 can be made for a non-earning spouse which would equate to a £3,600 pension contribution.

On death

Some pension benefits may continue upon death of the beneficiary. However, the benefits may only be payable to the surviving partner if there was a marriage or civil partnership. Some pension plans may also require that a beneficiary is nominated to receive any benefits on death. It is therefore very important to consider the terms of your pension policy.

Inheritance Tax (IHT)

Each person benefits from a IHT nil rate band (£325k). There is a further residential nil rate band of £175k per person (available for estates up to £2.2m). This is available where the main home is left to a direct descendant (children, grandchildren, other lineal descendants). For estates valued above these limits, IHT of up to 40% may be payable.

For married couples, there is no IHT due on the first death where all assets are left to the surviving spouse (spousal exemption). Therefore, in order to fully utilise these benefits, it is important to make sure your wills are correctly drafted. At UHY Ross Brooke we are qualified to review wills and can provide a will writing service. Find out more about IHT

Limited Companies – Profit Extraction

A limited company can prove to be a useful tool for tax planning purposes. Profits can be extracted (and taxed) when the need arises. This can be in the form of dividends, salary, or a capital distribution (on winding up). This can be particularly useful with a family business. For example, through careful structure of the company articles, it can be possible to make use of allowances of spouses with no or low income. The same can be said for children and other family members.

Family Investment Companies are growing in popularity and further information on these can be found here

Children

Use of allowances

Children are independent persons for tax purposes and are entitled to a personal allowance, CGT allowance, savings allowance, and basic rate tax band. In some circumstances it may be possible to utilise these allowances by generating income or gains in the child’s hands.

Income generating assets which have come via funds from parents are limited to a tax-free amount of £100. If the income exceeds this limit, then all the income is taxed on the parent. This limit does not apply to grandparents. As such, funds invested from grandparents gifts can enable a child to use their available allowances against the income or gains arising.

Junior ISA

The £100 limit does not apply to investments made into a junior ISA in which up to £9,000 per year can be saved in either a cash or a stocks and shares ISA.

Child Benefit – High Income Child Benefit Charge

Child benefit is paid to the main carer at a rate of £21.15 per week for the first child and £14 per week per additional child. The benefit is proportionally clawed back where either partner has income of over £50,000. The benefit is completely repaid where income is £60,000 or more.

Curiously, where each partner has income of up to £49,999, there is no clawback of the benefit. This can present a planning opportunity where couples are receiving unequal income. This could be through the reorganisation of property income (as above) or for business owners by restructuring company profit extraction.

Divorce and separation

In the unfortunate event of a breakdown of a marriage or civil partnership, it is important to consider the tax implications of dividing up matrimonial assets. The timing of these transactions will have important tax consequences.

Capital Gains Tax (CGT)

As above, a transfer of assets between spouses does not usually give rise to a CGT charge. However, this relief only applies to spouses who are living together. Spouses or civil partners are treated as living together unless they are separated under a court order, by deed of separation or where the separation is likely to be permanent. In any of these cases the nil gain/nil loss rule ceases to apply at the end of the tax year of separation.

If a couple permanently separates at the start of the tax year (6 April), they can still transfer assets CGT free up until the end of the tax year (the following 5 April). In contrast, where a couple permanently separate at the end of the tax year there will be little time to transfer assets free of CGT.

Assets transferred in the year following separation will be deemed to transfer at market value as the divorcing couple will still be considered ‘connected persons’. This will apply until the decree absolute is issued. Clearly obtaining timely advice will be crucial in these circumstances. Find out more about CGT

Next steps

If you have any questions relating to the above, please contact Tom Annat or your usual UHY Ross Brooke adviser if you would like to discuss your position.