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Saving tax by shifting income to your spouse

There are special rules that apply to income from assets that are jointly owned by married couples. These rules can assist you in shifting income to your spouse.

Shifting income to your spouse

Until as recently as 1990 a wife’s income was still treated as that of her husband’s for tax purposes. Whilst this old fashioned (and sexist!) system has been scrapped there are some aspects which enable you to alter the share of income on which you each pay tax where assets are held jointly.

HMRC’s view on shifting income to your spouse

HMRC have detailed and specific anti avoidance rules to tackle a situation where they consider you may be shifting income to your spouse purely to save tax. However, a relief from the pre 1990 system is still available which allows married couples to shift income between themselves and achieve a reduction in their tax liability.

Shifting income to your spouse – making a joint election

If you and your spouse jointly own an asset, by default HMRC take the view that income from it is taxable on a 50:50 basis.  This is irrespective of the actual proportions in which you own the asset - for example, if your wife owns 80% of a rental property and you own the remaining 20%, the taxman requires each of you to declare 50% of the income and pay tax on it.

You can get round this rule by submitting an election to HMRC on Form 17Using this form you can elect to be taxed on your share of the income (ie in relation to your actual interest in an asset), rather than the 50:50 rule mentioned above.

There are a number of conditions attached before you can make the election:

  • You actually own the property in unequal shares. You’ll also need to provide evidence to support the fact that your beneficial interests in the property are unequal - for example a formal declaration or deed
  • You are entitled to the income arising in proportion to those shares
  • You want to be taxed on the basis of your unequal shares

The election does not apply to income to which neither of you are beneficially entitled to, or in the following circumstances:

  • Partnership income (any profit split should be detailed in the partnership agreement)
  • Furnished holiday lettings where these are let on a commercial basis (for example not at discounted rates to friends and family)
  • Income from shares in a close company – this would usually apply to a company owned and controlled by you
  • Income that is treated as belonging to someone else for tax purposes – even if the income arises from property held in your joint names
  • Property that is not held in unequal shares

The tax rules allow you to continue to be taxed on a 50:50 basis in jointly held assets, even where these are held in unequal shares, and make the election when appropriate. 

Once you've submitted the election to HMRC to be taxed on your actual interest (for example 80%/20%) rather than the 50:50 split, this cannot be changed.

Shifting income to your spouse - example 1

Lois and Clark own a gym, 20% and 80% respectively. They receive net income of £20,000 a year from letting it to Luthor Enterprises Ltd.

As they both pay tax at the basic rate it makes no difference whether they are taxed on 50% each or on a 80/20 basis.

However, Lois gains a promotion and starts paying tax at 40% on her earnings, whereas Clark gives up his job to start voluntary work for a charity. He has no other income apart from this rent.

The couple make an election on form 17 and as a result £16,000 is taxed on Clark (£20000 * 80%).  This is partially covered by Clark's personal allowance and the remainder is taxed at the basic rate.   If no election is made Lois would pay tax at 40% on £10,000 rather than £4,000

Shifting income to your spouse - example 2

In 2016/17 Linda's quoted shareholdings pay her dividends of £20,000. Her other income as a photographer is £32,000.

As higher rate tax starts at income over £43,000, £9,000 of Linda's dividends will be taxed at 32.5%.  Her husband Paul has income of £28,000.

Linda makes each shareholding jointly owned by transferring a 5% share to Paul.  They decide not to make an election.

They are taxed on 50% of the dividends - £10,000 each. This means Linda is no longer liable to higher rate tax and neither is Paul.

If you own shares in your own private company, another way of shifting income to your spouse would be to issue shares to them (though it's best to do this when they support you in the business). You can read how to do this here.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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