Key Post Tax and investment planning for married couples

Brendan Burgess

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I am surprised that there is no guide to this important issue so I will write one. I am neither married nor an expert on tax, so corrections welcome.

In the interests of making the hypothetical examples easy to follow, I refer to people as Husband and Wife. The examples are true of any spouses or civil partners.

There are no taxes on transactions between husband and wife. A wife can gift her husband property and she pays no CGT on the disposal and he pays no CAT on the gift.

While it is administratively simpler for assets to be jointly owned as the surviving spouse can inherit the assets without the need for probate, there may be tax advantages to separate ownership.
 
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1) There is no downside to being jointly assessed for income tax

Being separately assessed can result in higher tax if the wife earns a lot less than the husband so always opt for joint assessment.
 
2) Make sure that she has enough income to maximise the €33,000 20% tax band

Where a couple is jointly assessed, his 20% tax band will be increased by any income she has up to a maximum of €33,000.

So, if it's possible to assign income to her, the annual tax saving will be: €6,600 (€33,000 @ 20%)

Investment implications

Investments such as property or shares should be in her name so that the income is hers.
You should aim for investments which generate taxable income rather than life funds where there is no income tax.
You should aim for investments which pay dividends rather than for investments where the return comes from capital gains.
 
3 ) Capital Gains get washed away on the death of a person.
So if the earlier death of one spouse is anticipated, any assets with taxable capital gains should be put in their name.
Presumably, any assets with unutilised CGT losses should be put in the name of the spouse expected to survive.

Let's say that a couple owns an investment property which they bought for €200k which is now worth €800k.
If they sell it, they will have a capital gain of €600k and pay CGT of €200k - 33% of €600k
If he dies when it is worth €800k and she subsequently sells it for €800k, the situation will be as follows:

Proceeds : €800k
Original cost of her half: €100k
Cost of his half when acquired by her on death: €400k
Total cost: €500k
Capital gain: €300k.
CGT @33% : €100k

However, let's say that his death is anticipated, and they move the property into his name before he dies.

The Capital Gains will disappear when he dies.
Her acquisition cost will be the value on death: €800k.
If she subsequently sells it, there will be no CGT payable as there will be no capital gain.
 
4) If some asset has an unrealised Capital Loss it should be put in the name of the survivor before the death.

Let's say that the couple has jointly bought shares for €300k and they are now worth €100k.
If he dies, her acquisition cost will be half the original cost - €150k + the value of his share on his death: €50k or €200k.

However, if they are transferred into her name before he dies, the acquisition cost will be the full original cost of €300k.
 
5) Pension contributions

See this thread for a fuller discussion

Key Post - Can a low paid spouse get 40% tax relief on their pension contributions?

If your wife has no income taxed at 40% and you have income taxed at 40% , you should make the contributions to your fund rather than to hers as you get more tax relief. This is not necessarily correct. One partner can be taxed at 20% and still achieve tax relief on pension contributions at 40%...
www.askaboutmoney.com

The maximum either spouse can contribute is a percentage of their salary. This percentage is determined by their age.

It is better to max the contribution for the lower paid spouse especially if there is any danger that the higher paid spouse's fund is approaching the €800k limit on which 25% can be taken tax-free.

Of course, where either spouse has an employer who matches their contributions, that spouse should contribute the maximum which the employer will match. This takes precedence over all other considerations.

The first €33k of her income is taxed at 20% irrespective of his earnings.
So her pension contributions should not bring her income below €33k.
It is better for him to make the contributions and get 40% tax relief.

For example, if she is earning €40k, she should not contribute more than €7k to a pension.

Brendan
 
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This strategy is not necessarily the best one in this case...

If partner A has a poor Prsi contributions record and little or no income, it is possible for partner B when reaching contributory pension age to claim an increase for a qualified adult. In many cases this will be far in excess of what partner A would achieve from their own Prsi contributions record.

The increase for a qualified adult is paid for partner A when partner B starts their contributory pension.

So it is possible for partner A to be a qualified adult below state pension age.

The increase for a qualified adult is means tested from the earnings of partner A, + investments held singly or jointly by partner A.

The income or singly held investments held by partner B are not included in the means test.

This situation often exists where one partner chose to cease employment and work full-time in the household.

Because the increase for a qualified adult is paid directly to partner B and where partner B would be liable for tax at 40% during retirement, the advantage of getting an increase for a qualified adult could be wiped out due to tax.

In this situation partner A, having no income, would not be able to make use of their PAYE tax credits.

Where the couples total income in retirement will fall below the tax exemption limit, or where their marginal retirement tax rate will be 20%, aiming to get the increase for a qualified adult definitely makes sense.
 
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I am trying to get my head around Partner A and Partner B above.

Do I understand it correctly?

If the husband retires he is entitled to an increase for a qualified adult dependent depending on his wife's earnings and assets?

The husband's earnings and assets are not relevant.
The wife's age is not relevant.

At the moment, the increase for a qualified adult with at least 48 average PRSI contributions is €248 per week or €13,000 a year if she is 66 or over. (Full rates here )

If the wife is getting any social welfare payment in her own right, the husband will not get a dependent adult payment for her.



Brendan
 
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What are the planning points around this?

1) Before the husband qualifies for the Contributory State Pension, the assets and income should be in his wife's name to make sure that she earns up to €33,000.
2) Just before the husband retires, this should be reviewed. It may make sense to transfer all the assets into his name so that she will have no income or assets and he will qualify for the extra €13,000 a year.
3) If she is also in receipt of the Contributory State Pension, it is probably better to leave the assets and income in her name.
4) If she is younger than he is she won't be getting the Contributor State Pension when he starts getting it.
 
Brendan Burgess said:
If the husband retires he is entitled to an increase for a qualified adult dependent depending on his wife's earnings and assets?
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Yes, but only when he claims his own contributory pension.
Brendan Burgess said:
The husband's earnings and assets are not relevant.
Click to expand...
Yes
Brendan Burgess said:
The wife's age is not relevant.
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Yes, but.
If she is under age 66 the extra payment is 184.70 euro.
When she reaches age 66 it increases to 248.60 euro.
Brendan Burgess said:
If the wife is getting any social welfare payment in her own right, the husband will not get a dependent adult payment for her.
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I am not certain on this but I think that if the wife had a smaler welfare payment this might be deducted from the Increase for a qualified adult
 
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Brendan Burgess said:
1) Before the husband qualifies for the Contributory State Pension, the assets and income should be in his wife's name to make sure that she earns up to €33,000.
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Yes that would be a good strategy.
Brendan Burgess said:
2) Just before the husband retires, this should be reviewed. It may make sense to transfer all the assets into his name so that she will have no income or assets and he will qualify for the extra €13,000 a year.
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Definitely this is a good idea. I don't know if it would be allowable to do this immediately before he claims his pension. Maybe it would need to be done a few years before retirement.
Brendan Burgess said:
3) If she is also in receipt of the Contributory State Pension, it is probably better to leave the assets and income in her name.
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If she will be getting a full pension, or a pension over 248.60 euro, Yes.
Although if she is younger than him and has no income, he could still gain the Increase for a qualified adult until she reaches age 66 and begins to claim her own pension. So in this case, No.
If she only qualifies for a small pension, then probably, No.
Brendan Burgess said:
4) If she is younger than he is she won't be getting the Contributor State Pension when he starts getting it.
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She won't get a contributory pension under age 66.
But he can get paid the Increase for a qualified adult regardless of her age.
 
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Does the following summarise it correctly? It can't be a comprehensive analysis of the issue - it is really just flagging the issue for people aged 66.

Complications arising from the Contributory State Pension

When he reaches 66, if his wife has no income of her own, he will get an IQA "Increase for a Qualified Adult".
His assets and income are irrelevant.
But her means are tested. The amount of IQA he gets is reduced if she has an income.

For example, if she has €20,000 income because we want to maximise the 20% tax band, then he will get no IQA for her.
It may be better to leave all the income and assets in his name so that he qualifies for the IQA.

Let's assume he qualifies for the maximum state pension and she is aged 60 and she has income of €20,000 which could be assigned to him.

If she keeps the income, she gains 20% of €20,000 or €4,000. But they lose gross income of €184.7 a week or €9,600 gross or about €4,800 net.

Planning point:
When he reaches 66, review the ownership of assets to make sure that benefit of assigning income to her is not outweighed by the loss of the IQA.
 
Yes that is a good description.

If their joint retirement income when he reaches 66 is less than 71k they would save less than 4k In tax, if she kept the 20k income.
 
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I am interested in married couples tax and investment planning if you have a large amount in a USA Stockbroker (in one stock symbol 'ORCL' I should diversify/switch to a more stable one) - i.e. liable to USA Estate taxes when I die - only first $60,000 exempt.

Expanding on this a little:

I am interested in:
1/Avoiding USA Estate taxes. (Or maybe just understanding estate taxes.)
2/Giving half to my wife before I die. (How much can I gift tax free to my wife annually)

(Recently unemployed now 54: I have a money makeover: https://www.askaboutmoney.com/threads/timid-investor-51-years-old-long-term-investment-plans.224998/ )

The only 'trick' I have heard is to give it all to my son and then double taxation comes in with credit for USA tax for my son's Capital Acquisition Tax.

Maybe I am over thinking this if CGT is wiped out on death if there is practically 33%CGT due on my symbol ORCL shares up to 40% tax is not so bad.

I tried my USA stockbroker but they do not give tax advice (especially since I am an Irish tax resident).
 
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Key Post - Be careful if you hold more than $60,000 in US equities

Of course what most people don't appreciate is that if you are not a US citizen or US resident and you hold more than $60,000 in US equities then US estate taxes apply to transfers between spouses on death. That's right if you die your spouse or civil partner would have to pay US Estate taxes...
www.askaboutmoney.com

Look who's getting away with not paying this estate tax

Foreign holders of U.S. assets who fail to pay estate taxes could be costing the U.S. Treasury billions of dollars.
www.cnbc.com
 
I am currently liable as I own most shares directly in a (USA) stockbroker.

From:

The impact of US Federal Estate Tax (US FET) for Irish Investors

This insight discusses how US investments held directly in a portfolio can lead to a US FET exposure and what steps can be taken to mitigate the position.
www.davy.ie

"For example, if you hold an Irish-domiciled unit fund which is fully invested in US assets, you will not have an exposure to FET as your holdings are in the Irish fund, not directly in the US-based assets."

Comes with not tax advice disclaimer.
(Sounds like a temporary closeable loophole.)

My other investments are funds with Zurich.ie and zurich.co.uk which may not be liable. My current company pension is not liable, but could be liable if switched to an ARF or PRSA.

Is this a reason to go for Zurich.ie fund/unit trust over owning shares directly? (41% Irish tax)
(There are other life assurance saving vehicles (standard life/vanguard), I have not asked Zurich.ie or standard life for USA estate tax liability.)

Where would I go to get this specific investment advice? Ask Zurich.ie before investing in a fund?
 
This might be a bonkers question...happy to be slapped down.

If 1 spouse earns a lot more than other and lower paid spouse has unused bandwith in the 33k band, say they earn 10k pa.

Can the higher earning (employed) spouse employ his wife and pay her an amount to use up some of the 33k band and save a bit on tax. Say she does a lot of admin etc for household.

I know, prob makes no sense...
 
No, because it the salary payment wouldn’t be deductible for the higher earning spouse.
 
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