Property Tax Advantages Of Having A Spouse!

Jennifer Adams considers whether there are any tax advantages in being married (or in a civil partnership).

The tax legislation includes specific rules in relation to assets held jointly by spouses (or civil partners). Those rules provide tax planning opportunities whether the tax being charged is as income tax, capital gains tax or inheritance tax.

Income tax implications - let property

As readers of Property Tax Insider are aware, the default position of property ownership as ‘tenants in common’ allows property to be owned in any proportion agreed between the co-owners and this then determines the share of profit to be taxed.

The position for married couples as tenants in common is different, in that they are deemed to own the property in equal shares, receiving income jointly, whatever the split of actual ownership. However, if it is more tax-efficient for a different split then the profit may be divided according to actual ownership once HMRC has been notified (on Form 17).

An instance where a property need not be owned jointly but there may still be income tax complications is where the property is rented or lived in by a ‘connected person’ who does not pay the market rent. Unsurprisingly, a spouse (or civil partner) is a ‘connected person’. In this situation, as a concession, HMRC will permit the deduction of full expenses but the claim is restricted to the rental income received. Expenses incurred in excess of this figure cannot create a loss; neither can they be carried forward to be utilised in any future year - they are, therefore, wasted.

Personal allowances

In the 2014 Budget, the Chancellor announced the transferable tax allowance for married couples. From April 2015, spouses (or civil partners) will be able to transfer up to £1,050 of their personal income tax allowance to their other half. This tax break will be available where neither person is a higher-rate taxpayer, such that to see any benefit, one spouse will need to earn less than the personal allowance. The transferable amount will be set at 10% of the personal allowance in each tax year.

Example 1: Joint property – profit allocation

John and Jane own a rental property producing a profit of £10,000 per annum. John is a basic rate taxpayer and his wife Joan earns £9,000 per annum (ie less than the personal allowance).

Therefore John can allocate £1,000 letting profit to Joan thus saving tax of £200.

Personal allowance restriction

Finance Act 2013 produced another tax planning opportunity using personal allowances, although that was probably not the intention. The personal allowance is reduced by £1 for every £2 of net income over £100,000, meaning an effective tax rate of up to 60% for any taxpayer with income in excess of £100,001 until the personal allowance is withdrawn completely.

Again, tax savings can be achieved by allocating a proportion of letting income to a spouse (or civil partner) who is taxed at a lower rate, or is a non-taxpayer.

Capital gains tax

Inter-spouse transfers normally fall outside the scope of both capital gains tax (CGT) and inheritance tax. The basic CGT provision is that a disposal for CGT purposes still occurs but rather than being at market value, the transaction takes place at a ‘no gain/no loss’ value (assuming that the spouses are living together). The transfer is not actually an exempt transfer - it is just that the transferee spouse acquires the interest in the property at the original cost to the transferor spouse at the date of transfer.

Although CGT-free, spouses do need to be mindful of the date of transfer. If the transfer forms part of a series of transactions designed to produce a tax benefit (for example, a transfer made shortly before an eventual sale to a third party) then HMRC may look to ascertain whether it is a true transaction or only undertaken for tax advantages.

If this method of tax planning is undertaken in respect of a private residence, the property actually needs to be lived in as a residence for a number of months before being sold. The changing of address of utility bills, rates, electoral role etc., will be needed here.

It should also be noted that the valuable ‘no gain/no loss’ CGT tax benefit disappears at the end of the tax year following permanent separation, rather than on divorce.

Example 2: Tax year of separation

John and Jane separate just after Christmas 2014 with John moving out on 6 January 2015. They are unsure as to whether their marriage will continue but after the August summer holidays they decide that the relationship really is over.

By that time they will have lost the ability to transfer assets between one another tax-free.

Principal private residence transfer

The only real tax disadvantage from a marriage/civil partnership from a CGT viewpoint arises where both parties own a property, as only one residence can be deemed the main residence, qualifying for principal private residence (PPR) relief, at any one time.

Should spouses own more property than just the PPR, the first thing to do on marriage (after making a will) is to nominate for one property to be the PPR. Once this form is signed and submitted to HMRC, the election can be amended at a future date. The declaration comes into effect from the date of signature (i.e. it cannot be ‘backdated’) and remains in place until a replacement form is submitted, but a form has to be in place initially for it to be replaced.

If an inter-spouse transfer takes place of an only or main residence, the ‘no gain/no loss’ rule still applies, but with an added twist. This is that the transferee spouse’s period of ownership is deemed to commence not at the usual date of transfer, but at the date of the original acquisition by the donor spouse. Furthermore, any period during which the property was the main residence of the donor spouse will also be deemed to be the main residence of the donee spouse. In other words, the transferee spouse stands in place of their other half (i.e. this time the transaction is effectively ‘backdated’).

Inheritance tax

For inheritance tax purposes, transfers between spouses are exempt transfers until the final annulment of the marriage or civil partnership. Transfers made on divorce, or for the maintenance of the family, are often also exempt from inheritance tax.

Practical Tip :

Many couples only consider their tax position when making a will, and some do not even go as far as that. The recent changes to the workings of personal allowances show that tax matters change year on year, such that a couple should also review their finances year on year in order to achieve maximum tax savings.