Tax on transferring income to a spouse

With the end of the personal tax year approaching fast on 5 April, now is the time to do some final tax planning. One area to consider is where you own income generating assets.

Capital assets that generate income can potentially be transferred to, or split with, spouses or civil partners who can utilise their own personal allowance and standard rate band. This may reduce your joint tax bill on transferring assets or income to your spouse. A civil partnership is treated the same as a marriage for tax purposes.

In this blog, we discuss this and other ways to split income or transfer reliefs to your spouse, giving you a potential to save tax.

Transferring income producing assets to your spouse

One tax planning approach is to consider transferring income producing assets between spouses or civil partners.

Income tax

This can be beneficial in circumstances where one person is a lower earner and is paying income tax at a lower marginal rate than the other and can mean that the person receiving the assets can benefit from utilising their unused personal allowance for the income generated from the asset. It can ensure that personal allowances are used in full and you face a reduced tax bill.

If you are considering transferring an asset to a spouse or civil partner you must understand that if the asset generates income, the receiver of the asset will be taxed on that income from the date of transfer.

This type of arrangement can also be called ‘income splitting’ or ‘income shifting’.

You should seek professional advice from accountants such as dns accountants as there are special rules that have been introduced to ensure that assets or investments are not being transferred just to ’shift’ income from one taxpayer to another. That said, it’s worth seeking advice as it doesn’t mean it can’t be done.

If you are thinking of transferring taxable rent or property income to spouse, then you will need to transfer an equal proportion of the ownership to your spouse as well. For example, if you wish to transfer 60% of the rental income to spouse from a rental property, then you’ll need to transfer 60% of the capital value of the property as well.

There will be other things to consider before a transfer is made. For example, if a property is mortgaged, then you will need to approach the mortgage lender, and this may give rise to issues or barriers to the transfer.

Capital Gains Tax (CGT)

One other important area to consider before transferring assets is that married couples and civil partners can transfer assets between themselves without triggering a Capital Gains Tax liability. However, this isn’t the case for unmarried couples. In this case, the transfer will be classed as a disposal for capital gains purposes and therefore this charge would outweigh any income tax benefits.

Stamp Duty Land Tax (SDLT)

It’s also worth considering Stamp Duty Land Tax (SDLT) as this can be triggered if the transfers of property between spouses are over the SDLT threshold. However, if it is a gift and there is no consideration or change in debt with the mortgage company then no SDLT liability will be triggered.

Other things on transfer to consider

There are likely to be additional costs to consider on the transfer of assets including transaction costs, so all of this needs to be considered and carefully calculated before a transfer occurs.

There are rules around Principal Private Residence relief, which can be complex. These may apply if you have ever lived in your investment property that you are looking to transfer.

Supporting you through the WDF process

Here at dns, our expert tax advisers will advise and support you through the whole WDF process. It’s important to seek professional advice to ensure compliance and that the right potential tax liabilities are included, the correct penalties are included and interest is calculated accurately.

UK tax laws can be complex. Cooperation and full disclosure with HMRC through a professional adviser will also help to reduce penalties.

Seek advice before you make a transfer to ensure you will indeed make savings.

Making a joint election to split income

It’s also worth knowing that if you and your spouse jointly own an asset (such as a property generating rental income), then HMRC will automatically treat it as taxable income on a 50:50 basis regardless of how the actual income is split or the percentage of the asset you each own.

However, you can change this by submitting an election to HMRC on Form 17. You can use this form if you want to change the split of income to your actual share of ownership. You’ll need to provide evidence that your beneficial interests in the property are unequal, for example a declaration or deed.

Once you’ve submitted the election to HMRC you’ll be taxed on your actual interest not the automatic 50:50 split.

Think longer-term tax planning

Just because one of you currently doesn’t pay tax or is in a lower tax bracket, you need to think longer term if this situation will change and ensure any future tax is also carefully calculated.

Also See: Landlords – transferring property to a limited company

Other areas of tax planning to consider

Personal allowance transfer

Where your spouse or civil partner does not use all their Personal Allowance if they have no earnings or their earnings are low, then consider jointly electing to transfer an element of their personal allowance to you (if you are a basic rate taxpayer) to reduce your tax burden.

Marriage allowance

Also consider the marriage allowance online. This married couple’s allowance is a perk of getting married and one of you is a non-taxpayer earning below the personal allowance of £12,570 and the other is a basic-rate taxpayer, earning between £12,570 and £50,270. So, becoming a married couple could reduce your tax bill!

In this instance the marriage allowance transfer allows the non-taxpayer to transfer up to 10 per cent, £1,260, of their tax-free personal allowance to their higher-earning partner to save them £252 a year in tax. Eligible claims can be back dated for up to four years and could be worth up to £1,242 in tax relief.

Cash savings

If you have a substantial amount of cash in savings accounts, look at which partner should hold this.

A non-taxpayer is allowed up to £5,000 of interest from savings tax free (in addition to their personal allowance of £12,570).

For basic rate and higher rate taxpayers the figure for savings is £1,000 or £500 of interest respectively tax free.

ISAs

Also consider longer-term investments such as shares and ISAs. Ensure that both you and your spouse have money invested in both cash and stocks and shares ISAs, because this will save on income tax and capital gains tax in the long run.

Summary

Higher rate or additional rate taxpayers with taxable income generating assets, such as rental property or shares, may be able to reduce their combined tax bills with careful tax planning. Where one person pays income tax at a lower rate than the other, the ability to save tax could be achieved by transferring some or all of the assets to a lower-earning spouse, making a joint election to split income, using savvy investment strategies or even getting married!

Property transfers tend to be more complex because you may have to transfer the legal ownership so as not to fall foul of HMRC rules and also a transfer of property may end up costing you more than the savings you make.

In all cases, careful tax planning is needed, so speak to an accountant, such as dns accountants to ensure you get advice from a qualified tax professional before you make any decision. Contact dns today for more help and advice on your tax planning.
Also see: Gifting shares to family members

About the author

Owais Bombaywala
Working closely with individuals and businesses to help grow their business requires a significant amount of experience and industry knowledge. Owais is BA (Hons) Accounting and Finance and Member of ACCA. Besides being a compliance champion, he specialises in Property tax planning. With over 7 years of experience in Accountancy and Tax world, our clients count on us to give them timely and up to date advise to help them make the right move. Owais works closely with some of the DNS’s most valued clients to give them the confidence they need to focus on their business. He is known for his calm nature and proactive approach. At DNS, we proud to be a modern and client centric firm. Our advise doesn’t just look at what’s best for your business moreover our aim is to help you achieve your personal goals. Away from work, he resolve family disputes and provide care and support to elderly people. He is a founding member of Human welfare organisation Hounslow.