Improving the tax efficiency of joint income

A useful tax-planning tool, in some situations, is when a married couple or civil partners split their joint income for tax purposes.

Background and example

Married couples and civil partners have been taxed independently of each other since 1990. But for some types of income, there is still an opportunity for a degree of tax planning. They can elect to be taxed on half the income or to share, proportionally, the asset that produces an income.

A good example would be a buy-to-let property. Without a joint income election, spouses/civil partners will be taxed as if they each receive half the income from the property – even if it isn’t owned 50/50.

The specific circumstances of each case will mean that either making a joint income election or making no election could save the couple tax.

This can be illustrated with this scenario:

Mr X is a higher-rate taxpayer and his wife, Mrs X pays tax at the basic rate. They receive a total net income of £15,000 per year from a rental property, of which Mr X owns 90% and Mrs X, 10%.

Without a joint income election, their joint tax bill would be less, because more of the rental income could be taxed on Mrs X’s basic rate. With a joint income election, if Mr X was taxed on his share, and at the higher rate, their joint tax bill would be more.

Sounds straightforward… tell me about the trap

There is a potential trap if and when the couple’s financial circumstances change. If Mr X stops working, for example, and his only income is his savings, which amounts to less than his personal allowances he will have no income tax liability. In this scenario, the joint income election would cost them more. But although it would certainly be better to revert to a 50/50 split, an election cannot be revoked.

A major drawback, then, unless there is a way to navigate around this obstacle?

Well, one solution could be for Mr and Mrs X to change the ownership of their asset. This essentially overrides the previous election, from the date of the transfer. Would a transfer of just 1% allows the spouses to revert to the 50/50 split? Yes! If and when Mr X returns to work, a new election could be made, if this supports better tax efficiency.

As always, individual circumstances will apply, so always check with a tax specialist, such as the chartered accountants at Figurit, before making any decisions that could have an unforeseen negative impact on your finances.  

For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.

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