In this, Part 1, of a series about taxation of the family I have highlighted below the importance of utilising allowances and the joint ownership of assets for the Married Couple. In forthcoming blogs I will go on to discuss Capital Gains Tax and Inheritance Tax issues and more specific issues for children.
Independent taxation means that husbands and wives are taxed separately on their income and capital gains. The effect is that both have their own allowances, savings and basic rate tax bands for income tax, annual exemption for capital gains tax purposes and are responsible for their own tax affairs. The same tax treatment applies to same-sex couples who have entered into a civil partnership under the Civil Partnership Act.
A child is an independent person for tax purposes and is therefore entitled to a personal allowance and the savings and basic rate tax band before being taxed at the higher rate. It may be possible to save tax by generating income or capital gains in the children's hands.
Separation and divorce can have significant tax implications. In particular, the following areas warrant careful consideration:
• available tax allowances
• transfers of assets between spouses.
Income tax allowances and tax bands
Everyone is entitled to a basic personal allowance. This allowance cannot however be transferred between spouses except for the circumstances outlined below.
Transferable Tax Allowance or Marriage Allowance
From 6 April 2015 married couples and civil partners may be eligible for a new Transferable Tax Allowance.
The Transferable Tax Allowance also referred to as the Marriage Allowance will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse. The option to transfer is not available to unmarried couples.
The option to transfer is available to couples where neither pays tax at the higher or additional rate. If eligible, one partner is able to transfer 10% of their personal allowance to the other partner which is £1,150 for 2017/18 (£1,100 for the 2016/17 tax year).
Couples will be entitled to the full benefit in their first year of marriage.
For those couples where one person does not use all of their personal allowance the benefit will be worth up to £230 in 2017/18 (£220 in 2016/17).
Eligible couples can apply for the marriage allowance at www.gov.uk/marriage-allowance. The spouse or partner with the lower income applies to transfer some of their personal allowance by entering some basic details.
Those who do not apply via the government gateway will be able to make an application at a later date and still receive the allowance.
If either you or your spouse were born before 6 April 1935, then a married couple's allowance is available. This is given to the husband, although it is possible, by election, to transfer it to the wife.
Joint ownership of assets
In general, married couples should try to arrange their ownership of income producing assets so as to ensure that personal allowances are fully utilised and any higher rate liabilities minimised.
Generally, when husband and wife jointly own assets, any income arising is assumed to be shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset.
Married couples are taxed on dividends from jointly owned shares in ‘close’ companies according to their actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people. For example if a spouse is entitled to 95% of the income from jointly owned shares they will pay tax on 95% of the dividends from those shares. This measure is designed to close a perceived loophole in the rules and does not apply to income from any other jointly owned assets.
Any plan must take into account specific circumstances and it is important that any proposed course of action gives consideration to all areas of tax that may be affected by the proposals.
Tax savings can only be achieved if an appropriate course of action is planned in advance. It is therefore vital that professional advice is sought at an early stage. We would welcome the chance to tailor a plan to your own personal circumstances so please do contact us.
Part 2 will follow in a few weeks, I'll be discussing some Capital Gains Tax and Inheritance Tax points of which Married Couples should be aware.
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