Sharing your income to save tax

The current economic downturn has resulted in falling income for your family, and now your partner has been made redundant. Can you transfer some of your income to them and save some tax in the process?

Saving allowances

If your partner loses their job, they may also lose the benefit of their tax-free personal allowance (currently £7,475). But there are ways to counter this loss of tax relief. What are they?

Timing

If the job ended part-way through this tax year, only part of their tax-free allowance will have been used against their salary. If they receive no more income for the remainder of the tax year, the unused personal allowance can be reallocated to the earlier months to generate a tax repayment.

Tip. Submit a tax repayment claim Form R40 after the tax year ends on April 5 2012. This form can be downloaded from HMRC's website.

Looking forward

To provide the non-working spouse with income in the future so that their tax-free allowances can be used, the family assets could be reorganised to shift income between spouses. Although the Taxman will attack non-commercial sharing of profits of family businesses, he has no objections where spouses gift investments or property to share the income from those assets.

Transferring assets between spouses

If you own an asset with your spouse, check whether it's as “joint tenants”, meaning you own it equally, or “tenants in common” (TIC), which means you can own a defined share, e.g. 20% and 80%. However, the Taxman is allowed to charge tax as if the income is split 50/50 unless he is notified otherwise. Although the TIC arrangement usually applies to property, it can be used for other assets, e.g. shares. A solicitor can alter the terms and proportions of property ownership, whereas you can notify the company registrar direct of any such changes relating to shares.

Tip. Notify the Taxman of any change in ownership proportions by sending Form 17 within 60 days of the change. Without this the Taxman will tax both owners on 50% of the income.

Trap. The Form 17 procedure can't be used for bank or building society deposits or property being taxed as furnished holiday accommodation.

Transfer taxes

The transfer of assets between spouses living together doesn't produce a Capital Gains Tax charge. But if you aren't married to your partner and you gift a share in an asset to them, it's treated as a sale at market value. If this is greater than the cost of the asset, the difference will be a capital gain chargeable to tax. There may also be some stamp duty to pay; check this with a solicitor.

Another option for property owners

If the working spouse jointly or wholly owns a rental property, an alternative way of generating income for the non-working spouse is to pay them as a property manager for the rental business. However, the wages paid for this work must be no more than a reasonable commercial rate and this might not be enough to cover the personal allowance for the full tax year.

For any more information or advice please don't hesitate to get in touch with us on 0191 386 4786 and we'll be glad to help you.

Sharing your income to save tax

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