Reducing your tax burden by means of Inter-Spouse Transfers
Part and parcel of what I do every day entails reducing my clients’ tax burden. As part of this many clients expect weird, wonderful and complex structures that will be expensive and high risk. However, before going down this route we should always explore the basic tax planning routes.
Simple family tax planning exercises involving the transfer of assets between spouses or civil partners can be a simple way of ensuring that the various tax exemptions available to each individual are fully utilised. If one spouse owns all the family assets this would not be possible.
Each spouse should ideally own assets amounting to at least the value of the inheritance tax (IHT) nil rate band (£325,000 for the tax year 2011/12); own assets which, on sale enables full use of the capital gains tax (CGT) annual exemption (£10,000 for tax year 2011/12) and own assets generating income so as to mitigate any exposure to the higher rates of income tax.
Transfers for IHT purposes are exempt transfers so long as the spouses remain married at the time of transfer, although they do not necessarily need to be living together. It should be mentioned that transfers from a UK-domiciled spouse to a non-UK domiciled spouse are only exempt up to the first £55,000. Despite this risk, such transfers enable overseas property such as holiday homes overseas that would otherwise be subject to IHT, to then qualify as ‘excluded property’ and therefore not be subject to IHT.
Transfers between spouses are not technically exempt from CGT. The way it works is that there is a CGT computation such that neither a gain nor a loss arises.
Inter spouse transfers can generally be carried out tax effectively. However, the transfer of an interest in, for example, the holiday home can be problematic as seen in the following example:
Mr A owns the holiday home. The family are selling the main residence and plan to move in to the holiday home and for it to become the main residence. Therefore Mr A gives 50% of the holiday home to Mrs A. If this transfer is made just before moving in, then the whole of the gain attributable to Mrs A on a future sale is to be free of CGT. If the transfer is made after moving in then she is assumed to have acquired her interest at the same time it was originally purchased by Mr A. The result of this is that on future sale of the property, her capital gain will not benefit entirely from main residence relief as her period of ownership includes the first ten years when the holiday home was not her main residence.
What this example highlights is the need for care on making inter spouse transfers as, if not properly undertaken, they can worsen the overall CGT position. Make sure you take professional advice before any such transactions!