View more on these topics

Gainful strategies

Having looked at ways of maximising income tax saving between married couples, I would like to turn to capital gains tax.

A husband and wife are taxed independently on their own capital gains. Each has an annual exemption of £7,900. This could mean a tax saving for each of them of up to £3,160 in the tax year (40 per cent of £7,900). However, the losses of one spouse can only be set against the gains of that spouse and not the other.

If an asset held jointly by a husband and wife is disposed of and a declaration has previously been made about the split between them of the property and the income from it (using Form 17 – Notice of Declaration of Beneficial Interest in Joint Property and Income), the same split will normally be applied for CGT purposes. If no declaration has been made, they will each be regarded as owning a half share of the asset, unless there is an express agreement to the contrary.

The most obvious CGT planning for a husband and wife involves the transfer of assets from one spouse to the other to maximise the use of the available exemptions or minimise the overall rate of CGT payable on a gain.

Transfers of assets to improve the income position may also help spread capital gains between spouses. Otherwise, a rearrangement of assets could enable each spouse to use their annual exemption.

Capital gains are added to a taxpayer&#39s taxable income as the top slice of income and taxed as if they were savings income at rates of 10, 20 and/or 40 per cent. Where both spouses use their annual exemption, if one is a 40 per cent taxpayer and the other a 20 or 10 per cent taxpayer, it may be advantageous to make a transfer to the lower taxpayer because a 20 or 30 per cent tax saving will be gained on part or all of the gain, depending on size.

Let&#39s look at an example. John has an annual income of £50,000 and Jill has earned income of £10,000. John has an investment portfolio worth £100,000. There is a latent capital gain on the portfolio of £20,000 after indexation allowance and taper relief. John intends to sell the portfolio later this year to finance a joint property purchase with his wife.

A considerable tax saving could be achieved if John transfers one half of his portfolio to his wife so that they own it on a 50/50 basis. This transfer gives rise to no immediate CGT or inheritance tax implications.

Compared with the original position (see above), on a later sale, assuming that investment values remain the same, the CGT liability would be calculated as follows (see below).

By transferring the portfolio into joint names a reasonable time before sale, a tax saving of £3,580 has been obtained. This is due to the fact that both John and Jill are now able to use their annual exemption. Also, £2,100 of the gain is now taxed at Jill&#39s lower rate of tax of 20 per cent rather than John&#39s higher rate of 40 per cent.

Income tax savings will also have been achieved in the meantime as half of any income from the portfolio is taxed at Jill&#39s lower income tax rate.

For inheritance tax, a husband and wife are treated as separate individuals. Transfer of property between UK-domiciled spouses is exempt from IHT. However, any gift from a UK-domiciled spouse to a non-UK-domiciled spouse will only be exempt from tax up to £55,000. Any balance would be subject to IHT but it may be that some or all of the nil-rate band may be available. The spouses could consider equalising their estates so that each can make use of the nil-rate band (currently £255,000). This could save tax of up to £102,000.

Now let&#39s have a look at the main impact that the death of a spouse has on income tax and CGT. When a husband dies, his tax affairs up to the date of death are dealt with on the basis of his being entitled to the full personal allowance and, if he is eligible, the married couple&#39s allowance. The widow obtains her usual personal allowance for the year.

From April 6, 2000, widow&#39s bereavement allowance was abolished except for women widowed during 1999/2000, who keep their widow&#39s bereavement allowance in 2000/01 for the second year of entitlement. However, as of April 2001, widows (and widowers) are now compensated for the loss of this allowance by the bereavement payment.

This is a tax-free lump sumof £2,000 that may be claimed following the death of a spouse. To qualify, either the deceased&#39s spouse or the deceased must not have been entitled to state retirement pension at the date of death and the deceased spouse must have paid sufficient National Insurance contributions prior to his/her death or his/her death must have been caused by his/her job.

Regardless of who benefits under the deceased&#39s will or intestacy, there is no CGT payable and the assets comprised in the estate of the deceased are revalued at the date of death for CGT purposes.

Recommended

Threadneedle shakes up pan-European growth fund

Threadneedle has announced that Dominic Baker will assume responsibility for its pan-European growth fund at the end of August replacing Susie Roberts who is leaving the fund manager to pursue a career in the sailing industry.Baker has been a member of Threadneedle&#39s European team since 2000 and is currently deputy manager of the select growth […]

Facing up to hard facts

IFAs and hard men – do the two go together?Hargreaves Lansdown&#39s Tom McPhail seems to think so after finishing the recent Hard Man Challenge in Staffordshire.McPhail joined the growing number of men who seek pleasure in mortification of the flesh through exercise and physical hardship.The six-mile cross-country chase followed by two circuits of an assault […]

Dunbar pushes life plan to IFAs

Zurich is aggressively promoting its Allied Dunbar protection range to IFAs following the sale of its Zurich Life subsidiary last week.IFAs claim that since the sale they have been contacted by Allied Dunbar broker consultants pushing the Dunbar-branded High Cover plan.The plan is a combined life and critical-illness product with annually reviewable premiums that has […]

Scottish Widows ignores bond bubble

Scottish Widows has created three unit-linked corporate bond funds for its Investment Solutions range of funds for its life and pension products. The funds are available through Scottish Widows&#39 flexible options bond, regular savings plan, personal pension, group personal pension, and executive pension plan and income drawdown products. The corporate bond assurance/pension fund and strategic […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com