Tax Tips For A Twosome!

Mark McLaughlin offers a selection of tax ideas for hopeless romantics!  

The words ‘tax’ and ‘romance’ will rarely (if ever) be seen or heard in the same sentence. Even the most hard hearted and dedicated tax professional would have to admit that reading an article about tax is unlikely to make pulses race or create the same warm glow, such as can be experienced by being with a loved one!

Is it possible to make romantic gestures whilst keeping an eye on the tax implications? With Valentine's Day in mind, here is a selection of tax ideas for those wishing to let their loved ones know they care (who said that romance was dead?!).

Show your loved one that you care with a gift of something (other than food, drink, tobacco or a gift voucher) bearing a conspicuous advertisement for your business. A tax deduction may be claimed if the cost of the gift is no more than £50 (ITTOIA 2005, s 47(3); CTA 2009, s 1300(3)).

If the beloved is employed in your business, note that legislation to be introduced in Finance Bill 2015 provides for a statutory exemption from a trivial benefits-in-kind tax charge up to a maximum of £50, if certain conditions are satisfied (although if the gift qualifies for this exemption, your loved one may not be flattered by only being given a ‘trivial’ gift!).     

If your only employee happens to be your special one, could you make your romantic candlelit dinner for two into a staff Valentine’s Day party? Staff entertaining doesn’t give rise to a benefit-in-kind up to a limit of £150 per head (ITEPA 2003, s 264(2)). This exemption only applies to annual events, so this could become a treat every Valentine’s Day!

What about a trading deduction for the party? Staff entertaining is allowable if it is not incidental to entertainment which is provided to others (ITTOIA 2005, s 46(3); CTA 2009, s 1299(3)). However, HMRC may need convincing that a Valentine's Day party with your significant other is ‘wholly and exclusively’ for the purposes of the business (see BIM45033)! 

If (perhaps during the candlelit dinner mentioned earlier?) you’re proposing marriage (or civil partnership), don’t forget to bring a diamond ring! Perhaps you bought it a long time ago in anticipation of the special day that you pop the question? There is no capital gains tax charge on the disposal of certain ‘wasting’ assets, i.e. those with a predictable useful life of 50 years or less (TCGA 1992, s 45). But as ‘diamonds are forever’, trying to convince HMRC that it is a wasting asset is likely to prove difficult! 

However, if its value is less than £6,000, the gift will in any event be subject to exemption from capital gains tax (TCGA 1992, s 262). If its value is more than £6,000, tapering relief is potentially available (i.e. the chargeable gain is restricted to five-thirds of the difference between the actual disposal value of the asset and the £6,000 chattel exemption limit). But if the disposal value is more than £15,000, such that the maximum chargeable gain exceeds the actual chargeable gain (i.e. 5/3 x (£15,000 - £6,000) = £15,000), marginal relief will not apply.

If getting married (or registering a civil partnership), think about making a gift of £2,500 to your betrothed within the inheritance tax exemption for outright gifts by one party to the marriage to the other (IHTA 1984, s 22(2); or alternatively, perhaps you could wait until after the wedding to make the gift, and claim the spouse exemption instead! 

Better still, if you and/or your beloved have affluent parents, what about encouraging them to make gifts instead, by subtly mentioning the £5,000 inheritance tax exemption for gifts to a party to the marriage by each parent?

Do you pay income tax at a higher rate than your spouse (or civil partner)? Does your spouse have unused personal allowances, and/or unused basic rate band? Then consider giving your loved one an income producing asset, such as that ‘spare’ investment property, or some shares in your company. 

Gifts between spouses (or civil partners) living together in the tax year are normally made on a ‘no gain, no loss’ basis for capital gains tax purposes (TCGA 1992, s 58(1)). For inheritance tax purposes, gifts between spouses domiciled in the UK are subject to an unlimited exemption. However, if the recipient spouse is not UK domiciled, any gifts are only exempt up to donor spouse’s nil rate band at that time (IHTA 1984, s 18(2)), unless the recipient elects to be treated as domiciled in the UK (IHTA 1984, s 267ZA), which would then bring his or her worldwide estate within the scope of inheritance tax.

Don’t get caught by the ‘settlements’ anti-avoidance rules by retaining an interest in the gifted asset (ITTOIA 2005, s 624(1). It must be an outright gift with no strings attached, which is not wholly or substantially a right to income. Make sure your beloved keeps the whole of the income for themselves (ITTOIA 2005, s 626). 

Why not employ your spouse (or civil partner) in your business? Of course, the expense must be incurred ‘wholly and exclusively’ for the purposes of the trade (ITTOIA 2005, s 34; CTA 2009, s 54), so make sure that the remuneration is a commercially justifiable reward for the duties performed.

In addition, the remuneration should be recorded as such in the business books and records, and should actually be paid to your beloved; otherwise, a tax deduction may be denied (Moschi v Kelly, CA 1952, 33 TC 442).

Are you and your spouse (or civil partner) regular basic rate taxpayers? From 6 April 2015, a spouse who is not liable to income tax above the basic rate can (subject to certain conditions) elect to transfer up to £1,050 (for 2015/16) of their personal allowance to their spouse, where the recipient of the transfer is not liable to income tax above the basic rate either, and makes a claim (see ITA 2007, ss 55A-55E). From 2016/17, the transferable amount is 10% of the personal allowance (specified in ITA 2007, s 35(1)).

Of course, the transferable allowance is only worth £210 in tax terms (for 2015/16); so it may be worth reminding your beloved that it's the thought that counts!

Consider building a happy future together by paying contributions to your partner’s registered pension scheme. Individuals who are eligible members of registered pension schemes are generally entitled to tax relief for contributions paid on their behalf (FA 2004, s 188(1)).

Even if you don’t employ your beloved in your business and he or she has no relevant UK earnings, it may be possible to contribute up to £3,600 per annum (gross) into the scheme (FA 2004, s 190(2)). Note that a third party who makes pension contributions on behalf of a pension scheme member may make those contributions net of basic rate tax (s 192(1); see RPSM05101320).

As indicated above, the pension contribution will be treated as having been made by your loved one for tax purposes, and he or she should therefore receive any tax relief due on the contribution (RPSM05100020). So don't be over-zealous by trying to claim tax relief on your romantic gift yourself!

Telling your spouse (or civil partner) that you’re leaving everything to them in your will should help to show how much you care. Make yourself even more endearing by pointing out that that your inheritance tax nil rate band will be transferable on death to your beloved as well (IHTA 1984, s 8A).

However, having promised your spouse an additional nil rate band, be careful not to use it up by making chargeable lifetime transfers or potentially exempt transfers which become chargeable within seven years of death; and don’t make any ‘gifts with reservation’ which have the effect of reducing the available nil rate band (IHTM43002). Whatever you do, avoid mentioning to your spouse that your nil rate band can’t be transferred to them if you get divorced (or if the civil partnership is dissolved); now is probably not the right time!

How about pointing out to your beloved that they will soon be able to inherit your individual savings account (ISA) tax advantages? The government proposes to allow savers an additional ISA allowance with effect from 6 April 2015, where their spouse (or civil partner) dies on or after 3 December 2014. 

The allowance is expected to be set at the value held in the deceased spouse’s ISA on the date of their death. In other words, the spouse will inherit the deceased’s ISA benefits; they will be allowed to invest as much into their own ISA as their spouse had via an additional allowance, in addition to their normal annual ISA limit. 

Make the moment even more special by explaining to your loved one that they will be better able to secure their financial future and enjoy the tax advantages you previously shared. However, don’t spoil it by pointing out that one of the conditions for the additional ISA allowance is expected to be that you were both living together at the date of your death!

The above is only a selection of tax ideas to kindle romance. There are other possibilities (e.g. involving pension benefits, enterprise investment scheme investments) which could be considered as well.

Finally, if your generous gestures fail to have the desired effect, all is not lost – the inter-spouse (or civil partner) exemption for capital gains tax purposes applies throughout the whole of the tax year of separation, and the inheritance tax spouse exemption continues to be available until the marriage is dissolved by decree absolute!