Mark McLaughlin offers a selection of tips for romantic taxpayers to coincide with Valentine’s Day.
The UK tax system is not known for being generous or romantic. The words ‘valentines’ and ‘tax’ are seldom seen or heard in the same sentence! However, to demonstrate that tax has its ‘softer’ side, here are a few tax tips to celebrate Valentine’s Day.
A time to be (tax-efficiently) generous
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? If so, you could consider giving them an income producing asset such as an investment property, or some shares in your company.
However, don’t get caught out 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. Your spouse should keep the whole of the income for themselves instead of sharing it with you, as otherwise this could trigger the settlements provisions (ITTOIA 2005, s 626).
Gifts of chargeable assets 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 (IHT) purposes, gifts between spouses domiciled in the UK are subject to an unlimited exemption. However, if the recipient spouse is not UK domiciled, the gift is only exempt up to a maximum of the donor spouse’s nil rate band at that time (less any previously exempt gifts) (see IHTA 1984, s 18(2)), unless the recipient elects to be treated as domiciled in the UK (under IHTA 1984, s 267ZA), thereby bringing his or her worldwide estate within the scope of IHT.
Valentine’s Day is probably not the best time to discuss death and wills! However, telling your spouse that you’re leaving everything to them in your will should help to demonstrate how much you care, especially if you are able to point out that that your ‘ordinary’ IHT nil rate band will be transferable to them on your death, and possibly a ‘residence’ nil rate band as well (IHTA 1984, ss 8A, 8D).
Tax relief for your gift?
Are you a business owner? If you are looking for that special gift idea, but are not excited by flowers or chocolates, consider spoiling your ‘significant other’ 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 available if the cost of the gift does not exceed £50 (ITTOIA 2005, s 47(3); CTA 2009, s 1300(3)).
Having said that, if your beloved is an employee of the business, an employment income charge on a gift may be an unwelcome surprise (ITEPA 2003, s 203(1)). However, a tax charge may be avoided if HMRC is satisfied that the cash equivalent of the benefit is so trivial that it is not worth pursuing (see EIM21863). Legislation is also being introduced in Finance Bill 2016 to provide a tax exemption for qualifying benefits-in-kind costing £50 or less.
An annual date
Continuing with the business theme, staff entertaining does not give rise to an income tax charge as a benefit-in-kind within certain limits. If your beloved is your only employee, consider having a Valentine’s Day meal, but bear in mind that there is a £150 per head limit for benefit-in-kind purposes if unexpected tax bills are to be avoided (ITEPA 2003, s 264(2)). This exemption only applies to annual events, so why not make Valentine’s Day an annual date?
Practical Tip :
Is tax relief for your business as a trading deduction for your Valentine’s Day annual event pushing things too far? Staff entertaining is allowable if it is not incidental to entertainment that is provided to others (ITTOIA 2005, s 46(3); CTA 2009, s 1299(3)). However, HMRC may need convincing that a Valentine's Day meal with your significant other is ‘wholly and exclusively’ for the purposes of the business!
