Five tax-planning tips for Valentine’s Day

What will you and your other half be doing to celebrate Valentine’s Day this year? If the days of flowers, cards and awkward dinners in packed restaurants are behind you, but your relationship is still on solid ground, there may still be good reason to “flash some cash” on 14 February.

By simply giving some money – or transferring an asset – to your love on Valentine’s Day, you can boost your combined financial security, cut your tax bill and, in doing so, demonstrate your long-term commitment.

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So. who said tax planning can’t be romantic? Here we run through a few Valentine’s gift ideas that could save you some serious money (and show you care).

1) Pay into your partner’s pension

If your partner has taken time out of work to care for children, or has a lower income than you, they may be struggling to build a decent pension of their own. However, many people aren’t aware that they can top up their partner’s pension by making contributions on their behalf. If they’re working, they will have the ordinary annual allowance for pensions (100% of income up to £60,000), but even if they aren’t earning, you can still pay in £2,880 each year which will be worth £3,600 once basic-rate tax relief has been applied.

First and foremost, this boosts your partner’s financial security, but it can also have tax advantages for you both – especially if you’re a high earner and have maxed out your own pension allowance.  

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The contribution will benefit from tax relief on the way in and will be sheltered from tax as it grows - your money will only be taxed on the other side, when you start making withdrawals. However, when you both have a decent pot to call on in retirement, you’ll be much better placed to manage those withdrawals tax-efficiently – potentially doubling the amount of income you can take between you before one of you slips into the higher-rate tax bracket.

2) Top up your partner’s ISA

Where there’s often a big discrepancy in earnings between couples, it’s likely that one might have a lot more in their individual savings account (ISA) than the other.

Everyone can save £20,000 a year into ISAs, but a fact that’s often overlooked is that that’s £40,000 between couples. You can’t open a joint ISA, but if you’ve maxed out your own ISA allowance, you can still pay into your partner’s instead (assuming they’ve got enough remaining allowance).

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If you’ve also got a decent amount of cash savings outside an ISA, and you’re likely to pay tax on your interest, you may also want to consider putting some money in your partner’s saving account. This way both of you can take advantage of the personal savings allowance.

3) Share your investments with your partner

If you’ve got any money in shares or investments outside an ISA or a pension, you’ll need to be keeping a particularly close eye on gains following the recent reduction of the capital gains tax (CGT) allowance to just £3,000 a year. It means that, over the years, even those with relatively modest investments could face a CGT bill when they eventually come to sell.

Rosie Hooper, a chartered financial planner from Quilter Cheviot, says: “This Valentine’s Day, if you are married or in a civil partnership, you can gift as much as you like to your spouse or civil partner without paying tax thanks to a rule known as ‘spousal exemption’. There is no CGT to pay on assets you give to your spouse or civil partner.”

By taking advantage of these rules and spreading your wealth between you, you’ll each be able to use your CGT allowance – doubling the tax-free gains you can enjoy each year to £6,000.

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Where paying some CGT is unavoidable, there’s still a benefit to giving assets to your spouse if they pay a lower rate of tax than you.

She adds: “How your money or assets are held, whose name is on the ownership and who will benefit from it is a key component of good financial planning. However, despite the potential tax benefits, married couples often forget to consider it. By ensuring assets are held in the right name and product, particularly if one partner is on a lower tax band, it is possible to reduce the amount of tax paid to HMRC.” 

However, if you are planning on giving any money or assets to your partner for tax reasons, it is important to be aware that you will be giving away the money outright - you cannot ask them to give it back further down the line.

4) Write – or update – your will

Presenting your partner with will paperwork on Valentine’s Day might sound like the opposite of romance but it could be the ultimate lover’s gesture – especially if your death could leave them vulnerable, or without a roof over their head.

Hooper says: “It is vitally important that you and your partner have accurate and up-to-date wills in place to ensure your wishes are fulfilled if the worst were to happen. This is particularly important for those who are not married as unfortunately couples do not enjoy the same rights or financial protections as spouses or civil partners on death. For example, unmarried couples without a will run the risk of not automatically inheriting anything on death unless they jointly own property. By contrast, a married partner would inherit all or some of their partner’s estate, even without a will being left.”

If you have a will but haven’t checked it in a while, it’s worth a quick review. Updating your will is particularly important if you’ve had any major changes in your love life – whether that’s one relationship ending or another one starting.

While you’re sorting out your will, it’s also a good idea to check that your pension providers know who you would like to inherit any defined contribution (DC) pensions you have such as a SIPP or workplace scheme. Pensions do not, currently, form part of your estate, so they cannot be included in your will.

You can tell your pension provider who you would like to inherit your pension when you die by completing an expression of wishes form.

5) Get down on one knee?

While not every long-term couple will want to marry or enter a civil partnership, there’s no arguing against the tax and legal benefits it offers couples that are happy to tie the knot.

You can take advantage of spousal exemptions for CGT, and you’ll have more legal rights if either of you die or decide to separate in the future.

It could also help you manage a brewing inheritance tax liability.

“For better or for worse, much of government policy around the tax benefits of your personal finances still favour those who are married or in a civil partnership,” says Hooper, who adds that: “This tax year, you can pass on up to £175,000 of your property tax-free [if it’s passed to direct descendants], which is effectively doubled to £350,000 when combined with the allowance of your spouse or civil partner. That’s layered on top of your inheritance tax allowance – or nil rate band – of £325,000, meaning it is possible to pass on £1 million inheritance tax-free as a couple.”