I might wish it wasn’t so but working mums often earn less than their husbands, and this blog is especially for those mums that don’t have a high income at this point in their lives.
To be truthful, the correct headline for this article should be: ‘why the higher tax paying spouse should pass their assets to the lower paying/ non earning spouse’. But I love starting off with something controversial.
It is very straightforward for a couple to introduce some simple strategies that would reduce the amount of money you pay to the taxman, and it’s all totally legal and above-board.
This rule applies to couples that are married and in a civil partnership. It doesn’t apply to couples cohabiting.
Women get tax rights too!
Can you believe that just over 20 years ago married women did not have to do their own tax return? Not because the Government decided that they didn’t have to pay tax, but because it was the husband’s responsibility to do a joint tax return. The wife therefore provided all her financial information to her husband and he then made the return.
Presumably it was thought that women had too much to think about with looking after the husband, the children & doing the washing & cleaning of the house. Why would she want to worry her pretty little head by doing something as difficult as dealing with her finances? After all, that’s probably why she got married…to have her man deal with this for her!
Luckily for all us independent married women this is no longer the case. The rules changed on 5th April 1990. Good job they didn’t choose April 1st or it may have just been considered a good joke!
What this means for a non earning spouse
Each individual under the age of 65 has a personal allowance, which for the 2012/13 tax year stands at £8,105. The allowance increases after age 65. Any earnings (including investment income) below that amount will not suffer any tax. So this means, you can earn £8,105 each year before you have to pay anything over to the taxman. After that level, tax rates then rise to 10%, 20%, 40% and 50% dependent on your total taxable income.
You can’t transfer any unused portion of your personal allowance to your partner if your income is less than this amount. However, if one partner is a non earner (or low earner) and the other partner is paying tax at a higher rate, there is some basic straightforward tax planning that can be done.
What you can do
Ownership of joint assets or assets held in the sole name of the higher rate tax payer can be transferred to the non earning spouse. Dependent on the level of income some significant savings can be made. The level of saving depends on the specific circumstances but will be greatest when there is significant investment income suffering tax at 40% or 50% by one partner and the other partner is a non earner or low earner.
How do I do it?
Any income on assets held jointly (including rental on an investment property) is deemed by the tax authorities (HMRC) to be split equally between the joint owners. If you want to change this ratio you would need to complete a deed of declaration to show that the legal ownership has changed. You then submit Form 17 to HMRC.
Is there a downside?
Do be aware that signing a declaration to say one party owns say 90% of a jointly held asset makes that person the legal owner of it. In a separation or divorce that spouse is deemed to be the owner. It is no longer split 50:50.
What if I’m not a tax payer?
Most banks and building societies deduct tax at 20% before you receive your interest. This tax can be reclaimed if you are not a taxpayer. However, it is possible to have the interest paid gross, without deduction of tax, by completing form R85.
Many bank accounts allow you to have half the interest on a joint account paid without deduction of tax where only one of the members is eligible.
What about capital gains tax?
The same planning tip also applies for Capital gains tax (CGT). CGT is payable on gains made on the sale of an asset. Each individual has an annual tax-free allowance of £10,600. Gains above this are charged at either 18% or 28% dependant on your tax rate.
It is therefore possible to save tax if one partner owns an asset in their sole name. If ½ the asset is transferred to the other spouse both parties can use their annual allowance. Alternatively a larger share or the entire asset could be transferred to a non earning spouse to reduce the tax payable.
Good luck with your tax planning. Isn’t it great you can earn something just by being clever with your taxes?
