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Key points
- The income tax exemption for ‘trivial’ benefits provided by employers.
- Up to 10% of the personal allowance can be transferred to a spouse or civil partner.
- Gifts between spouses or civil partners living together are normally made on a no gain, no loss basis.
- Transfer of income producing assets such as an investment property or shares.
- Could the staff entertaining rules be applied to a Valentine’s Day meal?
Some professions could be described as ‘sexy’. Unfortunately, tax is not one of them. It would also require a monumental stretch of the imagination to describe tax as ‘romantic’. However, romance can be found in the tax legislation; or to be more precise, tax can be used to fuel romance in a relationship. Of course, whether your ‘other half’ will appreciate tax being used in that way is another matter entirely.
For tax advisers such as those whose romantic actions include rushing to the nearest newsagent for a Valentine’s Day card on 14 February each year and finding that all the local petrol stations have run out of flowers, why not demonstrate that some thought has gone into this year’s Valentine’s celebrations by considering tax breaks to woo your lover?
However, a word of warning – I would suggest that having a ‘Plan B’ in place (perhaps a sunshine holiday abroad) might be a good idea just in case your significant other ‘goes nuclear’ at being used for tax planning arrangements.
Here are some ideas to help the Valentine’s Day celebrations of Taxation readers and their clients run smoothly.
Don’t mention ‘trivial’
Business owners who are looking for that special gift idea instead of the usual flowers or chocolates could consider spoiling their beloved with a gift of something (other than food, drink, tobacco or a token or gift voucher) bearing a conspicuous advertisement for the business. A tax deduction may be available if the cost of the gift does not exceed £50 (ITTOIA 2005, s 47(3); CTA 2009, s 1300(3)).
Be careful – if the recipient is an employee of the business, an employment income charge on a gift may not be hugely popular. However, there is an income tax exemption for ‘trivial’ benefits provided by employers if specific conditions are met (ITEPA 2003, s 323A to s 323C). There are no Class 1A National Insurance contributions on benefits that are exempt from income tax (SSCBA 1992, s 10(1)(a)). Further, there is a matching exception from Class 1 contributions for non-cash vouchers (in SI 2001/1004, Sch 3, Pt V para 6(da)).
Happily, this £50 maximum exemption applies to the benefit, not to the tax year. However, in the case of close company employers, if the benefit is provided to someone who is a director or other office holder of the company (or a member of their family or household) the individual has an annual exempt amount of £300. It would be most unwise to admit to your loved one that the gift is a ‘trivial’ one.
Made for sharing
What could be more romantic than sharing some of one’s personal allowance? Quite a lot, I would imagine. A spouse or civil partner who is not liable to income tax above (generally) the basic rate (separate rates apply in Scotland and Wales) can, subject to several conditions, elect to transfer up to 10% of the personal allowance (£1,250 for 2019-20) to their other half if the recipient of the transfer is not liable to income tax above the basic rates either, and makes a claim (see ITA 2007, s 55A to s 55E). The transferable allowance is given as a tax reduction and is worth only £250 in tax terms, so it may be worth reminding your beloved that it’s just a ‘token’ of your affection.
Further, how about pointing out to your beloved that they will one day inherit your individual savings account (ISA) tax advantages? An additional ISA allowance is available to a surviving spouse (or civil partner) up to the value of the deceased spouse’s ISA on the date of their death (or later date when the account is closed), if specific requirements are met (see The ISA Regulations SI 1998/1870, reg 5DDA). In other words, the surviving spouse inherits the deceased’s ISA benefits; they can invest as much into their own ISA as their spouse had done by way of an additional allowance, on top of their normal annual ISA limit.
Make the moment even more special by pointing out to your loved one that they will be better able to secure their financial future and enjoy the tax advantages you both previously shared. But don’t dwell on the fact that they might die first.
Can’t bear to be apart?
Parting is such sweet sorrow and that includes enduring long working days apart. So why not employ your spouse or civil partner in your business? Note that the expense must be incurred ‘wholly and exclusively’ for the purposes of the trade (ITTOIA 2005, s 34; CTA 2009, s 54), so make sure that the remuneration is a commercially justifiable reward for the duties performed.
The remuneration should be recorded as such in the business books and records; and it should be paid to your beloved – not simply entered as a book entry; otherwise, a tax deduction may be denied (Moschi v Kelly (1952) 33 TC 442). Alternatively, making your loved one a partner in your unincorporated business may help to demonstrate that you are equals at work – even if they don’t treat you equally at home.
Gifts – with ulterior motives
Show how much you care by giving your loved one a prized asset. If you pay income tax at a higher rate than your spouse or civil partner, or if they have any unused personal allowances and/or unused basic rate band, consider giving income producing assets such as an investment property or some shares in your company. Gifts between spouses (or civil partners) living together in the tax year are normally made on a no gain, no loss basis for capital gains tax purposes (TCGA 1992, s 58(1)).
Gifts between spouses domiciled in the UK are subject to an unlimited inheritance tax exemption. However, if the recipient spouse is not UK domiciled, any gifts are only exempt up to the donor spouse’s nil rate band at that time (IHTA 1984, s 18(2)), unless the recipient elects to be treated as domiciled in the UK (IHTA 1984, s 267ZA). Before making such an election, it should be noted that this would then bring their worldwide estate within the scope of inheritance tax so a careful review of the implications should be undertaken.
Be careful not to get caught out by the settlements anti-avoidance rules by retaining an interest in the gifted asset (ITTOIA 2005, s 624(1)). The gift must be outright with no strings attached and must not be wholly or substantially a right to income. The recipient spouse should keep the whole of the income for themselves instead of sharing it with the giver, so avoid paying the rental income or dividends into a joint bank account because otherwise this could trigger the less-than-romantic settlements provisions (ITTOIA 2005, s 626).
Candlelit dinner… tax-free?
Is your loved one the only employee in your business? How about treating them to a candlelit dinner for two on this special day for lovers? You might find it even more palatable if your business pays. (Romantic hint: don’t tell your significant other, they might think you’re a cheapskate.) Is tax relief for your business as a trading deduction for the dinner pushing things too far?
Staff entertaining is allowable if it is not incidental to entertainment which is provided to others (see ITTOIA 2005, s 46(3); CTA 2009, s 1299(3)). However, HMRC may need some convincing that a Valentine’s Day meal with your significant other qualifies as a ‘wholly and exclusively’ deduction for the purposes of the business.
Of course, your loved one will not welcome a tax charge on their meal. Is there a solution? Staff entertaining does not give rise to an income tax charge as a benefit-in-kind within limits. If your beloved is your only employee, consider having a Valentine’s Day meal, although bear in mind that there is a £150 a head limit for benefit-in-kind purposes if an unexpected tax bill is to be avoided (ITEPA 2003, s 264(2)). This exemption only applies to annual events, so there’s an opportunity to make Valentine’s Day an annual dinner date. If you’re not too extravagant, the exemption may cover a Christmas meal as well.
Make the future bright
How about demonstrating commitment to a long-term future with your partner by paying contributions to their registered pension scheme? Eligible members of registered pension schemes are generally entitled to tax relief for contributions paid on their behalf (FA 2004, s 188(1)). Don’t despair if you don’t employ your beloved in your business and they have no relevant UK earnings because it may be possible to contribute up to £3,600 a year (gross) into the scheme (FA 2004, s 190(2)).
Pension contributions on your beloved’s behalf may be paid net of basic rate tax (FA 2004, s 192(1)) and will be treated as having been made by your loved one for tax purposes. They should therefore receive any tax relief due on the contribution (see HMRC’s Pensions Tax Manual at PTM044220) so don’t be greedy by trying to claim the relief on your gift as well.
Expensive – but worth it
Isn’t it about time you popped the question? No, not the one about whether you can go on a golfing or spa holiday with your friends. If so, don’t forget to go down on bended knee brandishing a diamond ring. Perhaps it’s an old family heirloom inherited from a dearly departed grandparent?
There is no capital gains tax charge on the disposal of certain ‘wasting’ assets – those with a predictable useful life of 50 years or less (TCGA 1992, s 45). However, as the diamond itself may be one billion years old already, claiming the wasting asset exemption would probably be unwise. In any event, if the diamond ring is worth less than £6,000, the gift will be subject to exemption from capital gains tax (TCGA 1992, s 262).
If its value is more than £6,000, tapering relief is potentially available. The chargeable gain is restricted to five-thirds of the difference between the actual disposal value of the asset and the £6,000 chattel exemption limit. However, if the disposal value is more than £15,000, such that the maximum chargeable gain exceeds the actual chargeable gain (in other words, 5/3 x (£15,000 - £6,000) = £15,000), marginal relief will not apply. So be careful, or your romantic gesture may prove to be more expensive than you originally thought.
Where there’s a will…
Why not treat your spouse (or civil partner) and kill two birds with one stone … a Valentine’s Day trip out as well as something they will want to keep safe. Or to put it another way, take your beloved to the solicitors and pay for ‘matching’ wills.
Telling your spouse that you’re leaving everything to them in your will should help to demonstrate long-term commitment and generosity. Their sense of excitement can be increased by pointing out that they will have a second ‘band of gold’ to accompany the ring on their finger – a standard inheritance tax nil rate band will be transferable to them on your death, and possibly a ‘residence’ nil rate band as well (IHTA 1984, s 8A and s 8D).
Share and share alike?
Are you thinking of gifting shares in your trading company to your spouse or civil partner? Make sure the company is your beloved’s ‘personal company’ for capital gains tax entrepreneurs’ relief purposes.
This means you will need to give them at least 5% of the company’s ordinary share capital and voting rights, which must also satisfy one of the alternative 5% tests as to beneficial entitlement to distributable profits and assets available for distribution on a winding up, or beneficial entitlement to at least 5% of the proceeds on a disposal of the company’s entire ordinary share capital (TCGA 1992, s 169S(3)).
Your spouse or civil partner will also need to hold the gifted shares for at least two years, and be an officer or employee of the company (or a trading group member) throughout the whole of that period (TCGA 1992, s 169I(6)). Consider the gift carefully if there is any reasonable prospect of the company being sold within that time.
However, if an unexpected offer for the company is received within the two-year qualifying period, this should not be a problem for entrepreneurs’ relief purposes if you can persuade your better half to give (or sell) the shares back to you. This assumes that for at least two years before disposal the company has been your personal company, has remained a trading company and you have been an officer or employer throughout that period. But bear in mind one thing – it might not seem very romantic having to ask for your gift back.
Parting gesture
The course of true love never did run smooth. For example, tax-efficient romantic arrangements might be made with a view to seeking a reconciliation with a spouse or civil partner following a recent separation.
However, in case things don’t go according to plan, try to ensure that any gifts you make to your loved one are made in the tax year of separation, so that they remain subject to no gain, no loss treatment for capital gains tax purposes (if applicable), and will also generally benefit from the inheritance tax exemption for transfers between spouses.
Romantic non-fiction
Finally, the tax legislation can be a source of planning ideas with a romantic motive – think of the many twilight hours that could be spent in front of a roaring fire, glass of champagne in hand, poring over the contents looking for mutually beneficial tax mitigation ideas.
However, it would be unwise to buy your loved one a hard copy of the legislation (as a work of ‘romantic non-fiction’); a single volume is heavy enough to cause considerable damage if thrown accurately.
