Who Says Romance is Dead?! 

Tax and romance – not exactly the perfect match! However, in this Valentines season, the thoughts of the lovestruck (but fiscally frugal!) may turn to sharing their caring nature in a tax-efficient way. Here are some tax tips for a twosome (NB references to spouses include civil partners).

It’s theThought that Counts!

Gifts of assets between spouses living together are normally made on a ‘no gain, no loss’ basis for capital gains tax purposes. For inheritance tax purposes, gifts between spouses who are both long-term UK residents are subject to an unlimited exemption. However, if an income-generating asset is being gifted (e.g., a rental property, where the gifting spouse is in a higher income tax bracket than the recipient), the ‘settlements’ anti-avoidance rules can ‘bite’ if an interest is retained. So, the gift must be outright with no strings attached, which is not wholly or substantially a right to income. The recipient spouse should keep all the income (ITTOIA 2005, ss 624, 626).

You’re Hired!

Someone wishing to employ a loved one in their business must ensure that the expense is incurred ‘wholly and exclusively’ for the purposes of the trade, to be allowable expenditure (ITTOIA 2005, s 34; CTA 2009, s 54). The remuneration should be a commercially justifiable reward for the duties performed. In addition, the remuneration should be recorded in the business books and records, and actually be paid to the business owner’s beloved; otherwise, a tax deduction may be denied (Moschi v Kelly, CA 1952, 33 TC 442).

A Little Something

Business owners whose beloved is employed in the business might also arrange a romantic gift. An income tax exemption for ‘trivial’ benefits provided by employers (ITEPA 2003, ss 323A-323C) is available where certain conditions (paraphrased below) are met:

A: The benefit is not cash or a ‘cash voucher’.

B: The ‘benefit cost’ does not exceed £50.

C: The benefit is not part of ‘relevant salary sacrifice arrangements’ or other contractual obligations.

D: The benefit is not provided for particular employment services by the employee as part of their duties (or in anticipation of such services).

E: The ‘benefit cost’ of the benefit provided to the employee (or the amounts allocated to the employee where the benefit is provided to a family or household member who is not an employee) does not exceed the available exempt amount.

For Condition E (which broadly applies to closely-controlled companies), the individual has an annual exempt amount of £300. However, members of the office holder’s family or household who are employees of that company have their own annual cap of £300 (see HMRC’s Employment Income manual at EIM21870).

Two’s Company…

Sticking with the business owner, if their beloved is the only employee, consider having the business host a romantic Valentine’s Day meal. Staff entertaining does not give rise to an income tax charge for employees within certain limits. 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 make Valentine’s Day an annual dinner date!

Practical Tip

Staff entertaining (see 4 above) is allowable if it is not incidental to entertainment 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 one’s significant other is ‘wholly and exclusively’ for the purposes of the business!