If you pay tax at 20
per cent instead of 40 per cent on £29,900 in 2002-03, you'll save
£5,980.
36
More Ways to Use Your Personal Allowance
You've seen that both
partners can use income from investments in their own name to offset against
their personal allowance. There are other ways to earn a tax-free income,
apart from the obvious one of taking up employment.
- If you run a business you can employ your husband or wife and deduct
the salary he or she earns from your business income.
If you're paying tax
at the higher rate, the more business income you transfer to your partner,
the more you as a couple will benefit overall. Paying your spouse just the
tax-free personal allowance of £4,615 in 2002-03 will save £1,015
if you're a basic rate taxpayer, £1,846 if you're a higher rate taxpayer.
Paying a further £1,920 will save a basic rate taxpayer an extra £230
or a higher rate taxpayer £576.
But it's important
to remember that you can't pay your partner an amount grossly in excess
of the value of work undertaken.
Payment does actually
have to be made – issue a cheque for each transaction; don't simply
make a book entry.
- Alternatively you can make your spouse a full partner in your business.
This means that he
or she has authority to sign cheques alone or jointly and is named in the
partnership letterhead. In other words the partnership must not be a sham.
Profit is usually distributed according to the relative duties of each partner.
In some cases, the
way in which a husband and wife go about their business makes it clear
that a partnership has in fact existed for many years, even where no formal
tax claim has been made. If this is your position and your spouse had
no other earnings during the period, put in a claim for allowances to
which you would have been entitled if you had both been partners for the
current tax year and the six prior years. The repayment may, depending
on tax rates and reliefs for earlier years, amount to many thousands of
pounds. But you may have to persuade the Inspector that the partnership
did exist for all the years in question.
37
Capital
Marriage Breaks
Many income tax reliefs
relating to marriage have been removed, but the position on capital taxes
is quite different. If you make gifts to your spouse in your lifetime or
on death, there is generally neither capital gains tax nor inheritance tax
to pay. With capital gains tax payable at up to 40 per cent and inheritance
tax normally 40 per cent on death, this husband/wife exemption is highly
valuable.
But there is a trap
to avoid. If you leave all of your estate – worth, for example, £500,000
– to your spouse who has no capital and you die first, no inheritance
tax will be payable on your death. But when he or she dies, inheritance
tax will be payable on your spouse's entire estate, including what you left.
As a result, your nil rate band – £250,000 in 2002-03, will have
been wasted.
But if you had left
£250,000 to your children, this would have been covered by the nil
rate band. Similarly, the £250,000 then going to your spouse would
also be covered by the nil rate band on the second death. So the result
of leaving £250,000 to your children would be a £100,000 saving
of inheritance tax.
This example ignores
possible changes in inheritance tax rates and bands. Yet the message is
clear. If you can afford it and your children are sufficiently mature, leave
them enough of your estate to use up the nil rate band in both wills.
REFS is
a mine of invaluable information for the private investor.
