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Turning over new relief

Last week, I looked at the very basics of tax planning for married couples. This week, as promised, I will move on to the rules for married couples in respect of especially tax-efficient investments, starting with the enterprise investment scheme.

An EIS is a scheme under which investment can be made in an unquoted trading company which satisfies certain conditions. Each spouse has an investment limit of £150,000 for tax-relief purposes for 2003/04. In addition, an individual who invests on or before October 5 may elect to have up to one-half of the investment, up to £25,000, treated as having been paid in the preceding tax year. This is subject to the overall investment limit of £150,000 for the preceding tax year not being infringed. Tax relief for an investment in new shares is restricted to 20 per cent by way of relief against tax otherwise payable. Provided certain conditions are satisfied, it is possible to defer paying tax on any recent capital gains by investing in an EIS.

A husband and wife each obtain relief independently against their own income for a qualifying investment.

A venture capital trust invests predominantly in shares of certain unquoted trading companies. Tax relief at up to 20 per cent is available on investments in new shares of up to £100,000 in a tax year. Dividend payments are received tax-free within limits but without the ability to reclaim the 10 per cent tax credit. Provided certain conditions are satisfied, it is possible to defer the payment of tax on any recent capital gains by investing in new shares.

In many marriages, there will be an imbalance of wealth ownership between the couple. This can prevent maximum benefit being secured from the tax allowances and exemptions are available to the couple and we can&#39t have that, can we?

Let&#39s turn to the fundamental rule in respect of income arising from an outright unconditional gift between husband and wife. The income from any such gift will be taxed as the income of the recipient, not as the income of the person making the gift.

As we have been made well aware recently, this general rule does not apply to a gift between a husband and wife of a right to receive income (section 660A(6)(b) ICTA 1988). Such income is to be treated as that of the donor spouse. The Inland Revenue has attacked some husband and wife partnerships and co-owned companies where, in its opinion, a genuine partnership does not exist and where it feels the income split between the husband and wife is not justified by virtue of the extent of the involvement of the lesser-involved spouse. I covered this worrying development in a recent past article. As you will recall, the Revenue has recently expressed its views on this subject through the medium of its Tax Bulletin.

As well as the important 660A provision, it is important to note that a gift is not an outright gift if it is subject to conditions or if it could revert to the donor in any circumstances whatsoever. However, in the Revenue&#39s view, “in any circumstances whatsoever” does not include an independent decision by the recipient spouse to return it to the donor.

Where there is a straightforward gift or transfer of an asset from the sole ownership of a husband or wife into joint ownership by the couple, the income from the asset would be divided between the husband and wife in accordance with the normal rules for jointly-owned property, that is, a 50/50 split.

The mechanics of rearranging assets to maximise the benefits of independent taxation within marriage depend on the nature of the rearrangement taking place. I would like to look at four main types of transfer in this context.

Making outright gifts

•Bank and building society accounts – close the bank account and reopen it in new names or merely rename it. Check on the exact procedure with the bank concerned. With building societies, open a new account and transfer money into it.

•Life insurance bonds – use a deed of assignment.

•Unit trusts, Oeics and stocks and shares – use a stock transfer form.

Transferring investments into joint ownership where income and gains are to be taxed 50/50

The formalities are as for outright gifts. For assets other than building society and bank accounts, taxpayers may wish to own the asset as tenants in common. This enables each to dispose of his or her beneficial interest in the asset, for example, on death, thus avoiding the automatic reversion to the survivor. To do this, a declaration of tenancy in common must be completed to hold the property in equal shares.

Transferring investments into joint ownership (income/gains to be taxed other than 50/50)

This cannot be used for building society or bank accounts. The procedure is as above except that the appropriate proportions are stated in the declaration of tenancy in common. An election is made to the local tax office using a notice of declaration of beneficial interest in joint property and income (form 17).

Rearranging the beneficial entitlement to property already held jointly

Where income and gains are already shared and are to be shared on a revised basis, a declaration of tenancy in common must be completed and an election made to the local tax office again using form 17.

Based on these basic premises, some relatively simple opportunities arise. Where both spouses are under 65, a considerable tax saving could be achieved by rearranging ownership of income-producing assets to ensure each has at least sufficient taxable income to utilise their personal allowance.

When one spouse pays tax at the higher rate and the other no tax or tax at the basic/starting rate, consideration should be given to transferring income-producing assets to the lower taxpaying spouse to take as much advantage as possible of their basic/starting rate band.

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