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Norma&#39s conquest

Last week, I looked at a simple piece of tax planning for a couple aged under 65. Here&#39s another which applies when both spouses are aged 65 or over. A few bullet points will help us.

•When both spouses are aged 65 or over, it is beneficial if the total income of each is kept below £18,300 so each receives the full benefit of higher allowance. Income over £18,300, which leads to a loss of higher allowance, effectively suffers tax between 25 and 33 per cent.

•To ascertain whether a person has utilised their full personal allowance, including age allowance, income received after deduction of tax needs to be grossed up.

•For older persons, where one has total income that exceeds £18,300, it will still be beneficial to transfer capital and, therefore, income from the spouse whose income exceeds £18,300 to the one whose income is significantly below this to take advantage of the higher allowance. If one spouse is a non-taxpayer, this could be doubly advantageous as tax is saved on the income transferred and the personal allowance of the transferring spouse is increased.

•When one spouse is paying tax at the higher rate and the other no tax or tax at the basic/starting rate, consideration should be given to transferring the income-producing assets to the lower taxpaying spouse to take as much advantage as possible of that spouse&#39s £30,500 basic/starting rate band.

•Where 5 per cent annual withdrawals are taken from investment bonds (for the first 20 years), total income can be kept to below £18,300 while maintaining the real income of the investor. This is because withdrawals of up to 5 per cent of the original purchase price are treated as a return of capital and not as income in the year of withdrawal.

•Isas produce tax-free income. What&#39s more, Isa income does not count towards total income for age allowance purposes.

Let us look at an example. David and Norma are both aged 69. David has retired and receives an occupational pension of £13,500 a year. He receives a state pension this year of £4,027 and Norma one of £2,410 based on David&#39s contributions.

David has built up savings of £140,000 in a building society account earning gross interest of £5,000 a year.

It could be recommended that David transfers a sufficient sum into an account for his wife so that she uses her full personal allowance.

Because of the rearrangement of ownership of capital, David now qualifies for almost the full age-related personal allowance of £6,610 and the full married couple&#39s allowance. Norma now uses all her allowance, too. The adviser will have performed a highly valued service without relying on a financial product.

This does not mean a financial product will never be appropriate, just that the adviser has put forward a plan that provides real value without being perceived as selling.

The provision of advice can be the true differentiator in any attempt to establish sustainable competitive advantage.


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