Sharing income with your partner, a tax-efficient strategy.

August 17, 2022

How can I be tax-efficient as I share my income with my partner before marriage?

Living together prior to marriage is common. Although you are not legally "a pair", could there still exist a tax-efficient way to share your income?

Civil relationship vs Marriage

HMRC was defeated in a prolonged case which would prevent married couples or civil partners from dividing a company's income with an intention to get a tax bill of a lesser amount. 

HMRC has announced many times that it would ask the government to alter the law in order to prevent such tax-saving measures. However, it has not yet worked well.

Although unmarried couples can save tax by income sharing, they may have to incur other tax costs.

Problems with Capital Gains

If you give your unmarried partner a dividend in your company, then it can raise a CGT bill.

A real-life case

Let us consider the example of James and Jane, who have been a couple for ten years. During this time, Jane set up a successful company. Her income from the company allows her a position in the higher rate tax bracket.

On the other hand, James is a freelancer whose income never goes beyond £10,000 per year. As a result, James does not pay any income tax. Jane can move some of her income by moving simple shares in her firm to James. She can also pay dividends to them.

For the means of CGT, the transfer is taken as if Jane has sold the shares to James at the market value. As the value of the shares may have increased from the time when Jane paid for them, the increase in value can be a profit which is liable to taxation.

Instead, Jane should sell off enough of her shares on an annual basis, such that the resulting capital gain would be lesser than her yearly exemption on tax. This could allow her to income sharing.

If the transfer of dividends performed by Jane resulted in a gain exceeding the amount of her annual CGT exemption, then a BADR could be liable.

This would imply that the tax rate on gains would be only 10%!

Let us consider another scenario.

Jane owns 100 shares in her firm. In March 2023, each dividend has a value of £10,000. Jane transfers ten to James in March 2023. Then she sends another ten towards the end of April 2023. As a result, the capital that is gained is below £100,000.

After considering Jane's CGT annual exemptions for 2022/23 and 2023/24, she has a profit lesser than £87,700 every year. If the tax is considered at the BADR rate, then she owes £17,540 (£87,700 x 2 years x 10%).

James is then an owner of 20% of the basic dividends in the company. It helps him earn a gross of £30,000 every year.

He will thus be liable to pay tax on this of just £2,450 (£2,000 at 0% plus £28,000 at 8.75%). This is much less in comparison with the previous due amount of £11,805 (£30,000 x 39.35%). Thus, within two years, Jane and James have saved £18,710 in income tax. 

If your firm's business is growing, and therefore its value along with it, the sooner you transfer dividends to your unmarried partner, the better it shall be.

Do you want to be more tax-efficient? Have you been considering sharing your income with your partner?

Reach outfor a consultation to help you & your partner become more tax-efficient.

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