How to pass assets on to a spouse or civil partner more efficiently

The start of a new year is the ideal time to tackle wealth management tasks that we all know to be important, but which are all too easy to put off. If passing on assets to a spouse or civil partner as tax-efficiently as possible is high on your agenda, this exploration of key considerations by Andrew Chastney, senior paraplanner at Canaccord Genuity Wealth Management, will be invaluable.

Against this macro-economic backdrop of soaring inflation – with the cost of weekly shops, dining out, a round in the pub and energy bills on a steep upwards trajectory – there are few that remain completely unaffected. This tough financial environment is exacerbated by allowances being frozen or worse and income dropping after taking into account inflation, so we are all having to ensure the pounds in our pockets stretch further.

For married couples and civil partners, moving assets to a spouse or civil partner can engender significant advantages in terms of tax planning

This means it’s a really good time for investors and savers to look at ways to try and maximise the income and capital they have – and ensure they make the most of the tax allowances available to them. Shifting assets around can play a part in this. For example, for married couples and civil partners, moving assets to a spouse or civil partner can engender significant advantages in terms of tax planning. There are other advantages too – ISA allowances are one area and specific financial circumstances another, such as when you have a big age gap between partners and you have to bear in mind the financial future of the younger partner, assuming the elder partner dies first.

Here we map out some of the key areas that benefit from passing assets on to a spouse or civil partner:

Income tax allowances

There are a number of ways an income tax position can often be improved through considering who owns what and why. For example, in cases where there is a big disparity of income between the partners and investment assets owned, this can provide opportunities to save considerable amount of income tax.

Take the example of a wife who is a 40% taxpayer and her husband who is on the basic rate of income tax. The wife has an investment portfolio generating a dividend income. In this scenario, the wife is being taxed on dividends as a higher rate taxpayer, so it’s not a great tax position.

There are a number of ways an income tax position can often be improved through considering who owns what and why. For example, in cases where there is a big disparity of income between the partners and investment assets owned, this can provide opportunities to save considerable amount of income tax

But if you transfer investment assets from the wife to the husband, the husband will benefit from a more advantageous tax rate. You go from the dividends being taxed at 33.75%, to a mixture of tax free and being taxed at a rate of 8.75%. So, a tangible saving.

The husband can then also take advantage of the £2k dividend tax allowance which is otherwise lost. However, following the budget statement, this reduces to £1,000 on 6 April 2022 and to only £500 a year later reinforcing the importance of sound financial planning

The table below maps out a possible scenario:

Example of inter spousal transfer of assets and income tax planning:

Wife Husband
BEFORE:
Gross Income
£90,000 earnings
£20,000 dividends
£110,000
£20,000 earnings
AFTER:
Gross income – transfer of investment assets to husband
to leave investments providing £2k dividends only (gift)
£90,000 earnings
£2,000 dividends
£92,000
£20,000 earnings
£18,000 dividends
£38,000
IMPACT Dividends currently subject to income tax of £6,075
(£20,000 - £2,000 tax free allowance x 33.75%)

Restoration of full personal allowance of £12,570 (currently reduced to £7,570 as £1 reduction for every £2 above £100,000 – a hidden tax)

Dividends now tax free as all are within the dividend allowance. Additional £5,000 of earned income is also now tax free due to the clawback of the personal allowance.
£2,000 dividend allowance can now also be used by husband.

£16,000 dividends subject to 8.75% tax rather than 33.75%.

Dividends subject to tax of only £1,400 (£16,000 x 8.75%) rather than £6,075 as currently. Tax saving on dividends: £4,675

Here, the wife also gets her full personal allowance back thanks to her income now falling below the £100,000 threshold. It is very easy to fall into this trap, with a £1 for every £2 reduction in the tax-free personal allowance, above £100,000. With careful planning this situation can sometimes be mitigated. Meanwhile, the husband still has a tax liability but it’s much reduced. While the reduced dividend allowance will mean the tax saving will be lower it is still a tangible saving.

However, there are a few potential banana skins where passing assets on is concerned. For example, these are ‘absolute gifts’ – once made, these assets are no longer yours. This obviously comes with potential risks. What if the relationship breaks down? You have passed these assets on and that will be taken into account in a divorce settlement. While many of us like to think that this will not happen to us, taking action purely to save tax might not always be the best approach.

Another sticking point is that the wife’s scope (in the example above) to use her CGT allowance is reduced as there are less assets available so this is not suitable for everyone. It very much depends on specific circumstances. The tax regime continues to give preferential treatment to married partners and civil partners. If couples aren’t married, then it can have both CGT and IHT implications.

Generally speaking, passing assets on to a partner can significantly reduce the overall tax liability for married couples and civil partners by making those assets work harder for you. It can be a gift that keeps on giving.

Light bulb

Top Tip

As this piece emphasises, moving assets to a spouse or civil partner can generate really significant advantages in terms of tax planning, but implementing such strategies for maximum benefit can be a little complex. Many of the wealth managers on our panel are “one-stop shops” for both investment management and financial planning advice and can arrange the tax-advantageous shifting of assets for you, as well as taking care of all the administration hassle too. If you could benefit from some advanced family financial planning, why not let us arrange some no-obligation discussions with a short list of leading advisors?

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

Capital Gains Tax allowances

Capital gains tax is another area that can benefit from passing assets on to a spouse or civil partner. For example, if there are lots of capital gains, shifting some of your investment portfolio over to your spouse or civil partner would enable you to reduce your CGT bill and could ensure full use is made of both available allowances. With the CGT allowance reducing from £12,300 to only £6,000 from 6 April 2023, and then to £3,000 a year later, ensuring dividends are taxed at the lowest rate possible will become increasingly important. Making full use of available allowances is one way of achieving this. Shifting assets is a way to make the harsher CGT regime work harder for you. It is often a question of balance between income and capital gains tax benefits and drawbacks, requiring careful planning, and taking professional advice as appropriate.

ISA allowances

Transferring assets on to a spouse or civil partner can ensure the couple makes the most of their available ISA allowances – this is one of the most valuable tax breaks available, as it provides the opportunity for both tax-free income and capital growth. While the limit has been frozen at £20,000, if used by both partners every tax year, the long-term tax benefits can be very significant. This is particularly the case following the changes being made in the Autumn Statement and is very much a ‘use it or lose it’ allowance. Why not use it?

Additionally, if one partner dies, the other can inherit the ISA allowance from the deceased partner. So, for example, if a husband dies and has a £200k ISA, then his wife can inherit his ISA allowance as an Additional Permitted Subscription (APS), as it is called, which would enhance the overall pot. There are conditions and this depends on the ISA provider. It can mean that all investment assets fall outside the income and capital gains tax net.

As an example, one client inherited an ISA subscription of one million pounds from her deceased husband – she was able to add that to her pot, which was also one million pounds and so this doubled her ISA pot. The couple had built an ISA pot for the wife, as her husband had transferred £20k each year to finance her ISA. If he hadn’t transferred those assets each year, she wouldn’t have built up a separate income and tax-free pot. So, she was able to make the most of her own and her husband’s ISA allowance.

Transferring those funds between the spouses had enabled her to maximise that ISA allowance.

Non tax benefit

One other benefit of passing assets on to a spouse or civil partner is if there is a big age gap between them. It could be a scenario where there are children from previous marriages and as such, a concern that the surviving partner will not be well provided for.

In this case, a transfer of assets can help to improve financial security for the surviving spouse or civil partner. This isn’t a tax driven benefit but would help to provide a financial security blanket for the spouse or civil partner who is still alive. It gives some people comfort if assets are split in this way.

The current economic and fiscal environment is sending a bit of a shockwave through many quarters. Lots of people are being affected in ways they didn’t expect. But there are still ways that investors and savers can protect their income, which might help them hedge against the high inflationary environment. As with all these situations, good financial planning and active management of your finances can help reduce tax, by making full use of available tax allowances, rates, and ISAs.

Disclaimer

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. This is not a recommendation to invest or disinvest in any of the companies, funds or sectors mentioned. Names of companies, funds and sectors are included for illustrative purposes only. The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.

The tax treatments set out in this communication are based on our current understanding of UK legislation. It is a broad summary and cannot cover every circumstance and it does not constitute advice.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. CGWM and/or its affiliates may also be holding securities of the issuers it writes on.

Find Your Wealth's Paradise

We make the best advisors easy for you to access

Get Started

Find Your Wealth's Paradise

We make the best advisors easy for you to access

Get Started