Techzone

The UK tax system is built upon independent taxation. Individuals are taxed on their own income and gains, and have their own set of tax allowances. For families, this can lead to allowances being wasted and overall tax bills being higher than they need to be. In short, an unnecessary drag on returns.

Treating the family finances collectively and getting the most out of the allowances on offer can boost savings. It’s just a matter of getting the advice right. While tax allowances can’t actually be passed on to partners, tax relief and taxable income and gains can. The result - savings may last longer in retirement and increase the legacy available for future generations.

Double up on savings tax breaks

As a family unit, the pension annual allowance doubles to £80,000, with half as much again available to pay into an ISA.

Most clients will be aware they can use their spouse or partner’s ISA allowance to allow them to save tax free. This now allows a couple to save up to £40,000 a year into ISAs.

What is perhaps less obvious to clients is the ability to top up their spouse or partner’s pension. Thanks to tax relief, flipping pension saving between different family members could secure a much better financial future for their family than saving into their ISA.

A squeeze on pension funding
Wealthier clients may have seen the scope for their funding eroded by cuts in the lifetime allowance and the tapering of their annual allowance. Those feeling the pension funding pinch may need to seek an alternative home for their retirement savings. But the most tax efficient solution could lie close to home – by topping up their spouse or partner’s pension.

And remember, contributions aren’t limited to £3,600 but by the difference in their partner's current payments and their earnings. That’s potential for up to £80,000 of tax relievable pension savings each year.

But it isn’t just those who have their funding options restricted who may wish to direct their pension saving towards their spouse or partner. There are other reasons why this might make financial sense. 

1. Where one spouse pays tax at a lower rate than the other, it may make sense to divert pension saving to the one with the highest earnings to take advantage of more tax relief at higher rates. But this should only be considered if it doesn’t affect entitlement to employer contributions from a workplace pension.
2. A gross pension contribution reduces the income used to determine eligibility for certain allowances and benefits. Switching funding to the highest earner could not only see an increase in the tax relief available but could also result in allowances being retained. For example, personal contributions reduce the income used to test eligibility for the following allowances;
   
   Personal allowance (Reduces when income exceeds £100K) - a tax saving of up to £4,600.
   
   Child Benefit (Reduces when income exceeds £50K) - worth £5,002 for a family with 3 kids.
   
   Threshold Income for the Tapered Annual Allowance (£110K) - could mean extra £30K of pension funding available.

Two allowances are better than one when taking benefits

But it isn’t just when saving that clients can benefit from sharing allowances. Using two sets of allowances when accessing savings can reduce the tax payable, giving the family more spendable income in retirement.

The table below highlights the difference having two lots of allowances can have on income in retirement compared to having all the pension wealth owned by one spouse.

Transferring assets between spouses

There are also other allowances which spouses can use to access their savings tax efficiently.

Everyone has their own annual CGT allowance. A disposal of a jointly owned asset would mean that two allowances could be used to offset any capital gains.

And it's possible to transfer assets between spouses without creating a tax charge. Transfers between spouses are on a ‘no loss/no gain’ basis, with the second spouse deemed to have acquired the assets at the original base cost. Any gain is deferred until the second spouse makes a disposal. However, this only applies to transfers between spouses and civil partners living together at the time of the transfer. Transfers will be a disposal for unmarried couples and separated spouses.

Not only can this mean that both allowances can be used, but transferring assets to a lower taxpaying spouse could mean that gains in excess of the exemption can be taxed at 10% rather than the full 20% rate.

Changing who is taxable and the ability to control when tax becomes payable offer valuable planning options. Shifting the tax liability to a lower taxpaying spouse or partner can allow profits to be extracted tax efficiently. This could be a way of providing tax efficient retirement income or simply to allow existing investments to be recycled into something more tax efficient such as their pension or ISA.

Bond assignment between family members
Investment bonds can also be assigned between owners without creating a tax charge. Bonds are subject to income tax under the chargeable event rules. But there's no chargeable event when a bond is assigned. The new owner is assessable for all future chargeable gains as if they had owned the bond from inception.

Offshore bonds gains are treated as savings income. So clients with little or no other income may also be able to use their savings rate band and personal savings allowance as a way to extract profits tax free, in addition to their personal allowance. Overall, that’s a potential for gains of up to £17,500 to be taken.

There’s a 20% tax credit for tax deducted within the fund on onshore bonds which cannot be reclaimed. So gains will never be tax free. However, providing the gain after top slicing doesn’t push your client into higher rate tax, there's no further tax to pay.

Unlike the CGT rules, assignment isn’t restricted to spouses and civil partners. For example, assignments to lower tax or non-taxpaying children is a way for the family unit to benefit from further unused allowances - an ideal option for university funding perhaps. Provided the assignment isn’t for consideration (for money or money’s worth) there's no immediate tax charge.

Transfers between spouses are acceptable planning
Transferring assets into a spouses name shortly before surrender to reduce the tax payable on the proceeds is not deemed to be contentious. In HMRCs eyes, it's acceptable planning and is simply taking advantage of accepted and established practice.

This is highlighted in an example of gifts between spouses in the HMRC General Anti-Abuse Rule (GAAR) Guidance.

“There are no abnormal or contrived steps here; the transactions are normal arrangements between spouses or civil partners.” HMRC GAAR Guidance March 2017.

IHT - nil rate bands

Widow(er)s can also share any unused part of a deceased spouses IHT nil rate band. It's the unused percentage of the nil rate band from the estate of the first to die which can be claimed on the second death.

The Residence Nil Rate Band, which is available where the family home passes to direct descendants on death, is also transferable between spouses and civil partners. This is irrespective of when the first death occurred or whether they owned residential property on their death. 100% of the first to die’s RNRB can be claimed unless their estate was greater than £2M.

Summary

Considering finances as a family can boost lifetime savings and make those savings last longer in retirement. Of course, this won't suit everyone and some will prefer their own financial freedom and control.