Although many people know that transfers to spouses are tax-free, they often don’t consider how much to transfer, says Nick Braun in Business Tax Saver. Here’s why they should.
Let’s say a property is owned by a high-earning wife and produces £10,000 of rental profit a year. If she keeps the property she will pay £5,000 tax (50%); if she transfers it to her non-earning husband he will pay just £505 income tax.
A few years later the wife winds up her business and decides to sell the property, which is worth £50,000 more than when she bought it. Her husband is now a higher-rate taxpayer. If he sells the property he will pay 28% capital-gains tax (CGT) on that £50,000 minus £10,600, which is tax free, resulting in a £11,032 CGT bill. If he transfers the property back to his wife, he won’t be able to use his CGT exemption.
What he should do is keep roughly 21% of the property (£10,600/£50,000) and transfer the remaining 79% to his wife. This way he’ll pay no tax on his £10,600 capital gain and his wife will pay £5,184 on her gain of £39,400 ((£39.4k-10.6k) x 0.18) – a saving of £5,848.