Maximising Family Tax Allowances and Reliefs Print

Where in a family, one spouse is a higher rate taxpayer, and the other has no personal income, or is not a higher rate taxpayer, there is an opportunity for assets to be transferred from one spouse to the other so that the income generated becomes the income of the donee. This is of particular benefit where this enables the donee spouse to use their personal allowance against the income arising.

Although dividends are now charged to tax at 7.5% in the hands of a basic rate taxpayer, the first £2,000 of dividend income is not charged to tax, so transferring shares from an additional higher rate taxpayer to a basic rate taxpayer will be worthwhile.

In addition to the first £2,000 of dividends not being charged to tax, a personal savings allowance of up to £1,000 is available to basic rate taxpayers. This is reduced to £500 for higher rate taxpayers, and no relief is available to additional higher rate taxpayers.

Example:

David who is an additional higher rate taxpayer transfers part of his share portfolio to his wife, Ellie. His dividend income for 2021/22 is in excess of £2,000. For 2021/22 Ellie has a salary of £28,000 on which PAYE of £3,086 is deducted, and the portfolio produces dividend income of £22,000, and interest of £1,250 paid without deduction of tax. Ellie has no other income, and her tax liability is as follows:

Salary 28,000
Interest 1,250
Dividends 22,000
51,250
Personal allowance 12,570
38,680
Tax Thereon
First   £15,430 20% 3,086
Next          500 (Personal Savings Allowance) 0% 0
Next          750 20% 150
Next       2,000 (Dividend Allowance) 0% 0
Next     19,020 (37,700 – (15,430 + 500 + 750 + 2,000) 7.5% 1,426
Next        980 (£38,860 – £37,700) 32.5% 319
4,981
Less Tax deducted at source
PAYE 3,086
Tax Payable 1,895

If David had kept the portfolio in his own name, then his tax liability on the additional

£22,000 of dividend income would be £8,382, plus £562 on the interest giving rise to further tax payable of £8,944 for 2021/22. Accordingly, the tax saved by transferring part of the portfolio to Ellie is £7,049.

The transfer to the donee spouse must be an outright gift with the donee having full enjoyment of the income without reservation. Alternatively, the donor may prefer to transfer assets into joint names with his spouse. This would normally transfer 50% of the income to the donee spouse; the remaining 50% continuing to be assessed on the donor.

Care should be taken in selecting which assets to transfer to a spouse, as the transferee may not be entitled to the same reliefs as the transferor, in particular, Business Asset Disposal Relief.

In view of the potential tax saving that may be achieved, it is recommended that wherever possible assets should be transferred to spouses to reduce the amount of higher rate tax payable by the family unit.

Income arising to minor children out of capital given by the child’s parent continues to be assessed on that parent until the child attains the age of 18, or marries. There is no similar provision relating to CGT, and therefore any gains arising would be assessable on the child, who would be entitled to the annual CGT exemption.

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