The non-taxpayer can transfer £1,260 (approximately 10 per cent) of their personal allowance to the tax-paying spouse, resulting in an income tax saving.
This benefit only extends the personal allowance; it is not an income reducer and if the tax-paying spouse or civil partner’s income rises above the basic rate threshold, the benefit will be lost entirely.
Spousal exemption
The spousal exemption is the biggest benefit in terms of value and scope offered by marriage. This can be used to make income tax, capital gains tax and inheritance tax savings.
Assets can be transferred between spouses and will be treated on a nil gain/nil loss basis, with no CGT payable.
Any subsequent income generated from the transferred asset will now become the income of the recipient, and on death of the recipient it can be passed back to the original spouse, free of IHT.
So, rental properties or income-generating investments can be transferred between spouses, to maximise income tax efficiency – for example, a rental property can be transferred into the sole name of a non-taxpaying spouse.
This can also be carried out ahead of any potential disposal, where the gain can be spread between spouses to make use of individual CGT exemptions and preferable rates of CGT payable between spouses.
Likewise, on death the amount transferable between spouses is unlimited (as long as both are UK residents) and will not be subject to IHT.
This comes with a word of caution through the settlements rule.
In broad terms, the gifting spouse must not retain an interest in the asset, the gift must carry the right to the whole of the income and the gift must not be ‘wholly or substantially’ just a right to income.
Also under the government’s general anti-abuse rules (GAAR), care should be taken between spouses when gifting assets ahead of disposal.
Based on examples given by HM Revenue & Customs, it is likely to look disapprovingly where an inter-spouse transfer occurs, the asset is immediately disposed and both CGT exemptions are claimed but total proceeds are paid into a joint account.
If the proceeds are then used to purchase a joint asset then this inter-spouse transfer could be open to challenge by HMRC under GAAR.
The best practical tip here is to ensure that all income or disposal proceeds are paid into an account solely in the name of the recipient.
If the income or proceeds are to be reinvested then ensure these investments are also done in the name of the recipient.
IHT nil-rate band
Currently each of us has an IHT nil-rate band of £325,000 in the 2021-22 tax year. This is the net value of our estate that can be passed on to the beneficiaries free of IHT.
