If you are married or in a civil partnership, you may wish to consider making gifts of assets to your spouse or civil partner as there are a number of tax advantages that follow.
In this article “spouse” means husband, wife or civil partner.
Transfer of Shares to Spouse – Capital Gains Tax
Transfers of assets between spouses generally bear no capital gains tax consequences. When the ownership of assets is shared between the couple, so are any potential capital gains in respect of any future disposals of these assets. For example, if you are planning to sell a shareholding and the capital gain is likely to exceed your annual exemption resulting in a capital gains tax charge, why not transfer some of those shares to your spouse in order to utilise their annual exemption as well?
In the tax year ending 5th April 2015 (2014/15), the annual exemption is £11,000, rising to £11,100 in the year ending 5th April 2016 (2015/16).
Rose, who is a higher rate taxpayer, disposes of 500 shares in in XYZ plc in 2015/16 making a capital gain of £30,000. After deducting the annual exemption (£11,100), the chargeable gain is £18,900. This is subject to tax at 28% as Rose is a higher rate taxpayer. Rose is looking at a capital gains tax bill of £5,292.
If Rose transferred some of those shares, say half of them, to her spouse (basic rate taxpayer), the capital gains tax situation would be significantly different as both Rose’s and her spouse’s annual exemptions would have been utilised. Both Rose and her spouse would have chargeable gains of £3,900 each (after the annual exemption). Since Rose’s spouse is a basic rate taxpayer, subject to his taxable income and chargeable gain being below the basic rate band, he would pay capital gains tax at 18%. The capital gains tax would be charged as follows:
|Rose: chargeable gain of £3,900 at 28%||
|Rose’s spouse: chargeable gain of £3,900 at 18%||
The £3,498 saved in tax could then be used on a romantic holiday in the Caribbean.
Transfer of Property to Spouse – Income Tax
Similar to the example above, if you receive investment income, for example income from property or dividends, it may be beneficial to transfer some of the assets which generate this income to your spouse so that they receive 50% of the income thereby utilising their personal allowance. This is particularly advantageous for couples where one spouse’s income is subject to tax at the higher or additional rate while the other spouse pays tax at the basic rate.
Finance Bill 2014 introduced the idea of transferring a small part of personal allowance between spouses where the receiving spouse is a basic rate taxpayer. In the 2015/16 tax year, up to £1,050 of the personal allowance can be transferred.
It is also possible to make pension contributions on behalf of your spouse. If your spouse has no relevant UK earnings, the maximum pension contributions you can make for them is currently £3,600 per annum. However these contributions will be treated as having been made by your spouse for tax purposes so no relief is available for you.
Transfer of Assets – Inheritance Tax
Transfers of assets between UK domiciled spouses and civil partners are exempt regardless of the value of the assets being transferred. However if the transferor is UK domiciled but the transferor’s spouse is UK non-domiciled, the amount or value of the inter-spouse exemption is limited to the nil rate band at the time of transfer (this is currently £325,000).
There is an option for the UK non-domiciled spouse to elect to become UK domiciled for inheritance tax purposes, in which case the limit on the tax-free transfer does not apply. On the downside, this would also mean that the now UK domiciled spouse’s worldwide assets would potentially be exposed to UK inheritance tax.
When contemplating the type of asset that is suitable for inter-spouse transfer, it is worth bearing in mind certain other reliefs, such as Business Property Relief or Agricultural Property Relief, as well as your spouse’s eligibility for Entrepreneur’s Relief.