How to reduce tax with inter-spouse transfers

For married couples and civil partners, one of the simplest and most effective tax planning tools is the ability to transfer assets between each other without triggering an immediate tax charge. Whichever tax is being considered, inter spouse transfers can lower a household’s overall tax bill. However, some important conditions apply (NB in this article, spouses also refers to civil partners.

Income tax

One of the more well-known methods of saving tax is in transferring income-producing assets (e.g., savings or shares) between spouses where one spouse pays income tax at a lower marginal
rate than the other, or their income is less than the personal allowance.

Rental properties are another common example. By default, HMRC assumes rental income from jointly owned property is split 50:50 between spouses, regardless of the actual underlying ownership share. However, if it is more income tax-efficient for a different split, the profit may be divided according to the underlying ownership by submitting a form 17 to HMRC (e.g., should one joint owner own 90% of the property and the other 10%, the rental profits can be taxed in those proportions).

For couples where one spouse earns less than the personal allowance and the other is a basic rate taxpayer, the marriage allowance enables the reallocation of 10% of the annual personal allowance from one to the other. The claim is for £1,260, as a lower amount cannot be transferred; as such, the maximum tax reduction benefit is (£1,260 x 10% =) £252.

The allowance is in the form of a tax credit, being only available where one spouse or civil partner does not fully utilise their personal allowance. Higher or additional-rate taxpayers are excluded (i.e., whether the recipient or the transferor). The couple must be married for the whole or part of the tax year and still be married at the date of claim. However, there is no requirement for them to be living together, and therefore it can be transferred after separation.

Capital gains tax

Transfers of assets between spouses living together generally take place at ‘no gain, no loss’ for capital gains tax (CGT) purposes. This applies whatever actual consideration, or lack of consideration, there may be. Instead, the recipient inherits the donor’s original acquisition cost and acquisition date, with CGT only being payable when the receiving spouse or civil partner disposes of the property.

The transfer should represent a genuine change in beneficial ownership. Under general anti avoidance principles, HMRC may challenge artificial arrangements designed solely to obtain a tax
advantage, looking beyond the individual steps to determine the true legal nature of the series of transactions as a whole.

For further details, see the HMRC guidance on Capital Gains Tax for spouses and civil partners.

Inheritance tax considerations

Transfers between spouses who are long-term UK resident are generally exempt from inheritance tax (IHT). In addition, any unused nil-rate band and residence nil-rate band can normally be transferred to the surviving spouse, potentially doubling the available relief on the second death. As a result, where assets pass to the surviving spouse, no IHT is usually payable on the first death. Tax may arise only on the second death if the combined estate exceeds the available allowances

Settlement rules

The proviso in any transfer is that it must be a real, outright gift with a genuine change in beneficial ownership. Should the settlor retain any interest, HMRC could invoke the ‘settlements’ legislation to tax the income on the original owner.

Stamp taxes

Most transfers of assets between spouses do not attract stamp duty. The main exception being transfers of land or property. Thus, where (say) an investment property in London is transferred as a genuine gift and there is no mortgage, no stamp duty land tax is payable. However, if the property is subject to a mortgage and the receiving spouse assumes responsibility for part or all that debt, the mortgage assumed is treated as chargeable consideration.

Practical tip

Although the ‘settlements’ rules remain available, the last notable tax case brought is over 20 years old, HMRC having decided to focus on other priorities. Even so, it is a point to be aware of.

Disclaimer: The information provided on AccountingFirms.co.uk is for general informational purposes only and should not be considered professional accounting, tax, or legal advice. Always consult a qualified accountant or tax adviser for advice tailored to your individual circumstances.