Taxpayers handed over a record £6.8 billion in capital gains tax (CGT) in January 2019 – but many couples could be paying more than they need to.
Tax rules allow married couples and civil partners to rearrange their assets to take advantage of CGT reliefs and allowances, but few realise the rules can work in their favour by reducing bills.
But to take advantage of the rules, couples do have to jump through some hoops.
HM Revenue & Customs will normally tax gains made from selling property other than a main home, shares and other assets as an even split between each partner.
But couples can elect to change their share of ownership – providing they offer evidence to show their holdings are split unequally.
Savvy couples can save money
Richard Needham, personal finance specialist at advice firm NFU Mutual, said: “Many people paying CGT could have significantly reduced or eliminated any tax bill by sharing the burden with their husband, wife or civil partner.
“One big advantage that married couples and civil partners have over everyone else is it’s much easier to swap assets and drastically reduce CGT bills. Giving assets such as shares or property to anyone other than your spouse or civil partner could trigger a tax bill.
“Savvy couples make sure both individual allowances are used up and some if not all the tax bill is paid by the partner paying the lowest rate of income tax.”
Income shifting involves completing an HMRC Form 17.
Some points to watch include:
- Making sure shares in an asset add up to 100% – for example, a 66% to 33% share doesn’t work and must be 67/33 or 66/34
- HMRC must have the form within 60 days of signing or the declaration is ignored
- A declaration of trust drafted by a solicitor should be attached to the form to evidence the shift
Form 17s can cover any income generating asset, such as shares or investment property.
The shares can always be changed – but a new Form 17 and declaration of trust needs filing each time.
How income shifting works
This case study explains how income shifting works.
Peter and his wife Sarah have sold a letting property for a £60,000 profit.
They bought the home in February 2004 for £80,000 and have never lived there. Instead, they let the property as a buy to let to private tenants.
The property was sold in December 2018.
Peter is paid £50,000 a year, making him a higher rate taxpayer (40%) while Sarah looks after children and works part-time, earning £15,000 a year and pays income tax at the basic rate.
They have not shifted the rent income, so split their capital gain 50:50.
Peter’s CGT bill on his half share of the gain (£30,000) is ££5,124 charged at a CGT rate of 28% as he is a higher rate taxpayer.
Sarah’s CGT bill on her half share of the gain is £3,294 charged at 18% CGT as a basic rate taxpayer.
That makes a tax bill of £8,418.
Now shift the income around so Sarah has a 72% share of the property and her tax bill increases to £5,634, but she still pays at 18%. Meanwhile, Peter’s bill decreases to £1,484 as he retains a 28% share.
The total CGT bill is now £7,118 – a saving of £1,300 from income shifting.
What’s the point of income shifting?
A good point to remember is the point of income shifting is to move as much as possible of the income generating asset’s ownership to the basic rate taxpayer.
From 2019-20, that’s a banding of £50,000 less any other income they earn in the year.
Once both basic rate allowances are maxed out, there’s no point income shifting to save tax because both partners will pay at the same rate.
And don’t forget income shifting applies to income tax as well as CGT, so rental profits will also attract less tax.