Have you been thinking that if you could just transfer some of your investment income to your spouse then you will have a lower tax liability? If so, you are not the only one. This is a common question when we prepare client’s tax returns. Having just completed the tax season and nearing the end of another tax year soon, now is the perfect time to examine this topic.
Wouldn’t it be great having just paid the tax liability for 2021-2022 if you could manage to lower that tax bill for future years. There are various ways you can reduce your tax liability. One such way is to transfer assets and investments between spouses. So how easy is it to do that?
How easy is it to transfer some of my investment income to my spouse?
HM Revenue & Customs (HMRC) are not making things straight forward when it comes to transferring your investment income. To say the least the rules for income from assets jointly owned by married couples can be tricky.
Independent taxation was introduced in 1990 and since then various rules have been introduced into our tax system to ensure that assets or investments are not being transferred just to “shift” income from one taxpayer to another.
So just shifting income between spouses without any change in ownership will not lead to any tax saving.
For example, let’s take an example family of Mum, Dad, a one year old and a three year old. If Mum is working very part time and Dad holds significant investments then the obvious option would be to let Mum have more of the investment income and by doing so pay lower tax.
Without risking being sexist, let’s just make one clarification straight away, it is still the case that in the UK, mothers are the primary carers of the children in the family. This is likely to continue unless and until there are major changes to the rules for paternity leave, a bit like the Scandinavian countries. And so, for a while at least the Mum’s may find themselves earning less than their spouse.
In our simple example it would be hugely beneficial to divert some of the investment income to Mum. So, is it that simple? The short answer is no it isn’t. HMRC are not interested in making your life easier when it comes to optimum tax planning for your family.
What should I do to transfer my income to my spouse?
But that is not to say it can’t be done. There are a few things to take into consideration to make the transfer as tax-efficient and compliant as possible.
Remember with any tax planning you need to do things in the right order. You need to plan.
HMRC have outlined specific anti-avoidance rules to tackle situations where they consider you may be shifting income purely for the sake of saving tax. It’s important to ensure that you’re following the rules.
If only an income stream (for instance, rental income) is transferred to your spouse, and you continue to retain an interest in the capital value of the property, then you (the transferor) will continue to be taxed on the income. You can’t have your cake and eat it too!
If you would like to transfer the income and the tax obligation to your spouse, then you will also need to transfer an equal proportion of the ownership to your spouse too.
For example, if you would like to transfer 75% of the rental income to your spouse, a 75% interest in the capital value of the property must be transferred as well.
Now obviously this depends on the tax position of you as a couple. In our simple example it was a temporary fall in income but that is not enough to start a change in ownership. There needs to be some long-term thinking. That’s where we come in. A discussion around your assets and ownership, your plans and your ambitions would flush out the issues around changes to ownership of your investments.
There may be other factors to consider, the main one being if for example the property is mortgaged the lenders may have issues.
Incidentally, HMRC automatically taxes rental income at an equal fifty-fifty basis for married couples who own property jointly.
If you wish to be taxed at a different (unequal) split, you must complete Form 17 on the HMRC website. Form 17 is used to declare an unequal interest for jointly owned property. It must be completed within 60 days of making the transfer and you need to resubmit the form any time there is a change in the allocation of interest. If this is not done, then your interest will automatically revert to a 50/50 split.
What happens if I transfer some proportion of my investment to my spouse?
Normally when you give an asset away you will still be subject to Capital Gains Tax (CGT).
But luckily, you do not pay Capital Gains Tax (CGT) on transfers of capital assets between spouses, as long as you were not separated at the time of the transfer and it was not a business-related transaction.
However, Stamp Duty Land Tax (SDLT) is still payable on transfers of property between spouses if the amount transferred is over the SDLT threshold. So, this would be another consideration to think about before a decision is made.
If the share is a gift and there is no consideration (or change in debt with mortgage company) then there should be no liability to SDLT.
- The rules around Principal Private Residence relief are now very complicated and if you ever lived in your investment property then we’d need to rethink this relief for the future.
- A transfer of ownership doesn’t mean you need to transfer the legal title. But it is the simplest and easiest way to prove the change of ownership to HMRC.
What we have covered here is very general overview of what can be done to save tax between spouses. Obviously, you should not take any specific action without seeking professional advice first. If you would like to talk more about any of the above, please get in touch.
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