ATXP6 UK
Syllabus A1. Income tax A1a. The use of exemptions and reliefs in deferring and minimising income tax liabilities

A1a/A1ei. Basic income tax planning

Syllabus A1a/A1ei)

B7 The use of exemptions and reliefs in deferring and minimising income tax liabilities
and
Advise on the tax implications of jointly held assets

Tax planning

When we dealt with jointly owned assets, we illustrated the tax advantage to be gained from transferring ownership of an income producing asset, such as a rental property from a higher rate taxpayer to a spouse who was only a basic rate taxpayer

or even greater tax savings to be had when the transferee spouse was not even a basic rate taxpayer and was not therefore using some or all of their personal allowance. 

This would allow income that would have been taxed at 40% to now be taxed at 20% or indeed not taxed at all if the income fell within the available personal allowance of the transferee spouse.

The introduction of nil rate bands for savings income and dividend income has created opportunities for spouses to reduce their overall charge to income tax and may even give an advantage to transferring such income from a basic rate taxpayer spouse to a higher rate taxpayer spouse!

Example

Donald and Theresa are a married couple and have regular annual income as follows:

Donald
Salary £60,000

Theresa 
Salary  £18,000
Interest  £2,000
Dividends £9,000

It is clear from the above information that Donald is a higher rate taxpayer with taxable
income of £48,150 (60,000 – 11,850) and Theresa is a basic rate taxpayer with taxable
income of £17,150 ((18,000 + 2,000 + 9,000) – 11,850).

In this situation, it would normally be the case that for tax planning purposes it would be advisable to see if any investment income could be moved from the higher rate taxpayer to the basic rate taxpayer. 

This, however, is not possible as Donald’s only income is his salary. 

The introduction of the nil rate bands, however, means that in the above example tax savings can be achieved if firstly, £500 of the interest income could be made by Donald and therefore use his savings income nil rate band of £500 that is currently being wasted. 

This income is being taxed at 20% on Theresa as she has savings income in excess of her nil rate band of £1,000.

Theresa is £2,000 - £1,000 = £1,000 * 20% = £200

If she transferred £500 to her husband, he would use his nil rate band and she would save: £500 * 20% = £100 

The second transfer would be of sufficient shares to move £2,000 of dividend income from Theresa to Donald in order that both may use their dividend income nil rate bands of up to £2,000.

Currently Theresa is being taxed at 7.5% on £2,000 of her dividend income, so a tax saving of £150 (£2,000 * 7.5%) would be possible here.

Clearly in practice choosing the right amount of interest bearing securities and shares to transfer to Donald to allow usage of the available nil rate bands may be a little difficult to precisely achieve.

Carefully keep in mind that it is now not necessary to transfer from a higher rate payer to a basic rate payer to save tax, it can be the other way round also.