Comments on strategy re pensions and LTA

[Steveam]

The OP implies that tax management or minimisation is an objective. If this fits with your values so be it. I don’t have kids and will have more than enough to see me out. My values are about society and I view tax as just a part of being in a society I value. I don’t mind paying tax - it fits with my values. (Just to be clear: I enjoy being rich and it gives me freedom and choices but I don’t bother to avoid tax - my choice. I realise other people donate vast amounts to charities - I don’t - or have kids to support.)

Best wishes,

Steve

[ursaminortaur]

The OP implies that tax management or minimisation is an objective. If this fits with your values so be it. I don’t have kids and will have more than enough to see me out. My values are about society and I view tax as just a part of being in a society I value. I don’t mind paying tax - it fits with my values. (Just to be clear: I enjoy being rich and it gives me freedom and choices but I don’t bother to avoid tax - my choice. I realise other people donate vast amounts to charities - I don’t - or have kids to support.)

Best wishes,

Steve

Just using a Pension or ISA to save is itself a measure to minimise tax compared to saving outside of a tax wrapper. The government provides such tax wrappers and the rules covering them - making best use of those rules is not a crime but just common sense. Tax evasion or dreaming up some complicated scheme to avoid tax (aggressive tax avoidance) is or at least can be illegal but that isn't what is being talked about here.

If you personally don't want to take advantage of things like Pensions and ISAs to reduce your tax bill then that it is your choice but I see nothing wrong with people who want to using these government provided facilities.

Although the numbers doing so are pretty small you can also if you wish pay extra tax in the form of a gift to HMRC

https://www.taxjournal.com/articles/want-to-pay-more-tax-

If they are sincere, then I have good news for them: the government makes it easy for any UK-resident individual or UK-registered business to make voluntary payments to HM Treasury. Although gifts cannot be ring-fenced for a specific purpose or assigned to a specific area of public spending, donors can decide whether they wish to make a donation towards general public expenditure or to reduce the national debt.

To donate towards general public expenditure, all that is required is a simple email to the Treasury providing basic information. The donor must also acknowledge that they cannot request a refund of the donation once it has been made. They also have to confirm that the monies are theirs to give and are not the proceeds of crime, money laundering or other illegal activity. The Treasury then provides details of the bank account and reference to be used. It could hardly be simpler.

People wishing to contribute to the reduction of the national debt embark on a similar, simple process with the UK Debt Management Office.

[Steveam]

The OP implies that tax management or minimisation is an objective. If this fits with your values so be it. I don’t have kids and will have more than enough to see me out. My values are about society and I view tax as just a part of being in a society I value. I don’t mind paying tax - it fits with my values. (Just to be clear: I enjoy being rich and it gives me freedom and choices but I don’t bother to avoid tax - my choice. I realise other people donate vast amounts to charities - I don’t - or have kids to support.)

Best wishes,

Steve

Just using a Pension or ISA to save is itself a measure to minimise tax compared to saving outside of a tax wrapper. The government provides such tax wrappers and the rules covering them - making best use of those rules is not a crime but just common sense. Tax evasion or dreaming up some complicated scheme to avoid tax (aggressive tax avoidance) is or at least can be illegal but that isn't what is being talked about here.

If you personally don't want to take advantage of things like Pensions and ISAs to reduce your tax bill then that it is your choice but I see nothing wrong with people who want to using these government provided facilities.

Although the numbers doing so are pretty small you can also if you wish pay extra tax in the form of a gift to HMRC

https://www.taxjournal.com/articles/want-to-pay-more-tax-

If they are sincere, then I have good news for them: the government makes it easy for any UK-resident individual or UK-registered business to make voluntary payments to HM Treasury. Although gifts cannot be ring-fenced for a specific purpose or assigned to a specific area of public spending, donors can decide whether they wish to make a donation towards general public expenditure or to reduce the national debt.

To donate towards general public expenditure, all that is required is a simple email to the Treasury providing basic information. The donor must also acknowledge that they cannot request a refund of the donation once it has been made. They also have to confirm that the monies are theirs to give and are not the proceeds of crime, money laundering or other illegal activity. The Treasury then provides details of the bank account and reference to be used. It could hardly be simpler.

People wishing to contribute to the reduction of the national debt embark on a similar, simple process with the UK Debt Management Office.

Thank you Ursaminortaur. I was trying very hard to avoid “virtue signalling” and I absolutely take your points about the use of tax breaks as offered by the rules - I have both a SIPP and ISAs - I just don’t see tax minimisation as something to spend much time or effort on. I certainly wasn’t and don’t suggest that a crime is being committed.

Best wishes,

Steve

[Neutrino]

And then, at age 75 there is a second forced LTA test. This captures any uncrystallised sums (if you follow the strategy above, you won't have any of these) and rather spitefully, also any overall gain in the crystallised components. To avoid this one, you need to be sure to have withdrawn at least the full nominal gains between crystallising and age 75.

Or, if it is difficult to withdraw sufficient without going into a higher tax bracket, use some of the crystallised funds to buy an annuity before age 75.

Anyone who isn’t confused really doesn’t understand the situation.

[Myfyr]

And then, at age 75 there is a second forced LTA test. This captures any uncrystallised sums (if you follow the strategy above, you won't have any of these) and rather spitefully, also any overall gain in the crystallised components. To avoid this one, you need to be sure to have withdrawn at least the full nominal gains between crystallising and age 75.

Or, if it is difficult to withdraw sufficient without going into a higher tax bracket, use some of the crystallised funds to buy an annuity before age 75.

Anyone who isn’t confused really doesn’t understand the situation.

There will also be an LTA test when you purchase an annuity before age 75.

Not sure how that works if you only use part of a crystallised fund. Perhaps it is pro rata. Perhaps you cannot annuitise part of a crystallised fund because you certainly cannot transfer part (ie partial transfer) of such fund.

[ursaminortaur]

And then, at age 75 there is a second forced LTA test. This captures any uncrystallised sums (if you follow the strategy above, you won't have any of these) and rather spitefully, also any overall gain in the crystallised components. To avoid this one, you need to be sure to have withdrawn at least the full nominal gains between crystallising and age 75.

Or, if it is difficult to withdraw sufficient without going into a higher tax bracket, use some of the crystallised funds to buy an annuity before age 75.

Anyone who isn’t confused really doesn’t understand the situation.

There will also be an LTA test when you purchase an annuity before age 75.

Not sure how that works if you only use part of a crystallised fund. Perhaps it is pro rata. Perhaps you cannot annuitise part of a crystallised fund because you certainly cannot transfer part (ie partial transfer) of such fund.

You can use part of the crystallised fund and it is pro-rata

see

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088640#IDAFMNKB

Where only part of the drawdown pension fund or flex-access drawdown fund is used to purchase a lifetime annuity, or the drawdown pension fund concerned was built up by several previous designations of uncrystallised funds, the amount the BCE 4 crystallised value is reduced by is calculated on a pro-rata basis.

For example, a lifetime annuity is purchased using half of the funds of a drawdown pension fund that was generated by three designations at different times. For each designation £100,000 was deemed to have crystallised, giving a total deemed crystallisation value of £300,000 for the drawdown pension fund. As only half the fund is used to purchase the lifetime annuity the amount crystallising under BCE 4 is the annuity purchase price less £150,000 (half the total crystallised value of the drawdown pension fund).

[Myfyr]

And then, at age 75 there is a second forced LTA test. This captures any uncrystallised sums (if you follow the strategy above, you won't have any of these) and rather spitefully, also any overall gain in the crystallised components. To avoid this one, you need to be sure to have withdrawn at least the full nominal gains between crystallising and age 75.

Or, if it is difficult to withdraw sufficient without going into a higher tax bracket, use some of the crystallised funds to buy an annuity before age 75.

Anyone who isn’t confused really doesn’t understand the situation.

There will also be an LTA test when you purchase an annuity before age 75.

Not sure how that works if you only use part of a crystallised fund. Perhaps it is pro rata. Perhaps you cannot annuitise part of a crystallised fund because you certainly cannot transfer part (ie partial transfer) of such fund.

You can use part of the crystallised fund and it is pro-rata

see

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm088640#IDAFMNKB

Where only part of the drawdown pension fund or flex-access drawdown fund is used to purchase a lifetime annuity, or the drawdown pension fund concerned was built up by several previous designations of uncrystallised funds, the amount the BCE 4 crystallised value is reduced by is calculated on a pro-rata basis.

For example, a lifetime annuity is purchased using half of the funds of a drawdown pension fund that was generated by three designations at different times. For each designation £100,000 was deemed to have crystallised, giving a total deemed crystallisation value of £300,000 for the drawdown pension fund. As only half the fund is used to purchase the lifetime annuity the amount crystallising under BCE 4 is the annuity purchase price less £150,000 (half the total crystallised value of the drawdown pension fund).

.

Not a bad guess then

[UrbanAchiever]

Each pound put into a pension that ends up being over the LTA is essentially taxed at 40% if withdrawn at basic rate tax - £1 becomes 75p after the LTA charge and that gets reduced to 60p after 20% income tax. If withdrawn at higher rate the total tax is 55%. So if you are getting 60% tax relief then it is still worthwhile contributing to the pension.

If you only get 40% tax relief there is no income tax advantage of the pension over an ISA, assuming basic rate tax in retirement and tax rates don't change.

The main additional tax benefit of the pension is that the it falls outside your estate for inheritance tax purposes. Whether that is of value to you depends on your personal circumstances.

My situation is uncannily similar to the OP.

Would you mind clarifying what you've said about the calculation for the LTA tax when taken as income?

I assumed each pound above the LTA was taxed at 25% plus your income tax rate (20% as per my plans). So this gives a total tax rate of 45%. However your example suggests the 25% LTA tax is applied first, then the income tax rate is applied to what remains after the LTA tax charge is deducted?

This makes sense as it gives an effective 40% tax rate, however HMRC website isn't clear about this, just saying you pay an additional 25%. And the pensionbee example on their website just says you pay 25% then your relevant income tax rate.

I'm sure you're right but would be good to get clarification.

Incidentally I'm on the cusp of moving into the 45% income tax bracket, so when I do it sounds like there will still be a small benefit of me going over the LTA, however I need to balance this with the flexibility of putting it into an ISA - I want to retire before I can access my pension, so will need funds to live on before then.

[TedSwippet]

I assumed each pound above the LTA was taxed at 25% plus your income tax rate (20% as per my plans). So this gives a total tax rate of 45%. However your example suggests the 25% LTA tax is applied first, then the income tax rate is applied to what remains after the LTA tax charge is deducted?

The latter. The 25% LTA penalty is applied at crystallisation. Then, normal marginal income tax on withdrawals from the remaining 75%, which may happen either sooner or (perhaps much) later. Effective combined rates are therefore: 40% if in basic rate tax on withdrawal; 55% in higher rate tax; 58.75% in additional rate tax; and 70% if in the spiteful 60% 'bubble' bracket at £100-£125k or so.

Incidentally I'm on the cusp of moving into the 45% income tax bracket, so when I do it sounds like there will still be a small benefit of me going over the LTA, however I need to balance this with the flexibility of putting it into an ISA - I want to retire before I can access my pension, so will need funds to live on before then.

Are you certain you will always be in basic rate tax on withdrawals? Remember that you will need to make some potentially heavy withdrawals annually from your pension to avoid a stinging LTA penalty at age 75. There is a forced LTA test when you reach that age.

For example, suppose you were to crystallise everything at £1mm, giving £750k for drawdown. And suppose stocks grow at around 4% real annually. Factor in 3% (optimistic!) for inflation gives 7%. 7% of £750k is £52k. You would need to draw at least this annually on average up to age 75 to avoid an LTA penalty at that age, but it is already above the threshold for higher rate tax, even without accounting for other investment income, state pension and so on.

If you won't be able to stay in basic rate tax when withdrawing from your pensions, then unless there is an employer match, worthwhile salary sacrifice uplift, or similar, then additional pension contributions will be a net loser. The 'Alternative 1' table in this article shows the winning combinations. They are: 45% tax relief and 20% on withdrawals; and 60% tax relief and 20%, 40% or 45% on withdrawals. All other cases result in a net loss. (Except 40% relief and 20% on withdrawals, which is neutral but an effective loss because it ties up money unnecessarily.)

All this with the caveat that I'm ignoring a pension's usefulness for some as an inheritance tax bypass. If this does matter to you, your considerations might be different. Also of course, sweeping assumptions that tax rates, thresholds, allowances, and so on, won't change (ha!).

[UrbanAchiever]

That's incredibly helpful, thank you.

I think I was so focused on tax mitigation when I was in the 60% marginal income tax bracket that I didn't review this when I came out the other side of it.

Added to the equation, my wife and I own 2 rental properties which currently generate a combined £20k of taxable net income pa which is split equally between the two of us. So £10k of additional income (before any rent increases in the future), which will further exacerbate the issue of trying to stay in the 20% income tax bracket when drawing down my pension and trying to avoid the remaining £750k growing beyond the LTA.

One option would be to sell one/both properties ahead of drawing on my pension so that there is no taxable income from the properties to worry about.

Clearly would only sell one in each tax year to minimise CGT.

However, we are fortunate to have a combined £500k of equity in them, which will be challenging in terms of getting that cash into ISAs.

Really feels like I need to throttle back on my pension contributions to the lowest allowable to attract maximum from my employer (7% from me to get 10% from them).

Perhaps any additional contributions I would have made should go into a SIPP for my wife? She earns c.£16k including the property income, so pays 20% tax. So less tax advantageous going in, but given she has no pension at all, will not hit the LTA, and she'll benefit from the 25% tax free withdrawal.

[TedSwippet]

One option would be to sell one/both properties ahead of drawing on my pension so that there is no taxable income from the properties to worry about.

But what would you do with the money that releases? Unless you store it as physical cash or similar (which would be self-defeating!), wherever you invest or place it will itself generate some taxable income; dividends, interest, etc. At least until you can get it all into ISAs, and that will take several (perhaps many) years.

If your wife's earning are low, you could I suppose 'gift' this money to her. Or maybe you can 'gift' your half of the investment properties, but not sell them. I suspect which, if either, may depend heavily on your wife's other assets and earnings.

Really feels like I need to throttle back on my pension contributions to the lowest allowable to attract maximum from my employer (7% from me to get 10% from them).

That's a worthwhile match, so even if you exceed the LTA you want to keep it. Beyond that though, as you can see from the relative numbers, once you hit the LTA there may be little to be gained, and often something to be lost, by contributing to your pension beyond the optimum point for employer match.

Perhaps any additional contributions I would have made should go into a SIPP for my wife? She earns c.£16k including the property income, so pays 20% tax. So less tax advantageous going in, but given she has no pension at all, will not hit the LTA, and she'll benefit from the 25% tax free withdrawal.

Worth considering, but unless you've set up your properties as a company, the property income part of this may (I think) not count as 'pensionable earnings'.

My own approach to this has been two-pronged. Firstly, I gave up work several years earlier than planned (hurrah -- no regrets!). And secondly, I have organised my holdings so that my stocks live in ISAs and unwrapped trading account, and my pensions are now largely bonds/gilts. This damps down the gains and (some of) the volatility of my pensions, so that I don't have to face so much of a withdrawals crunch in the run up to age 75.

The LTA is a pensions planning major PITA.

[JohnB]

The LTA is planned to continue rising with inflation from 2026, so you in TedSwippets scenario its the TotalReturn-inflation figure that needs to be withdrawn, so its 4% of £750k = £30k. If the 4% is split 1% capital growth over inflation, 3% dividends, the £250k lump sum is contributing £10k capital gain and £7.5k dividends. The former is within allowance, the latter is £5.5k over and taxed at 8.75% (33.75 if combined with pension you hit HRT).

If you have another £500k unsheltered, the extra £20k capital gain will attract tax, and the £15k dividends will make you touch the HRT limit.

Bottom line, if pensions+unsheltered >£1.5m, very hard to avoid significant tax, only ISAs can deflate problem slowly.

[TedSwippet]

The LTA is planned to continue rising with inflation from 2026, so you in TedSwippets scenario its the TotalReturn-inflation figure that needs to be withdrawn, so its 4% of £750k = £30k. ...

Unfortunately not.

In the scenario under discussion (and one that I am in fact living!), once £1.073mm has been crystallised, the entire LTA has been 'used up'. In that case, future rises in the LTA will be of no benefit, because there's none left to use. In order to avoid an LTA penalty on crystallised funds at age 75 then, BCE 5A, you need to withdraw all the nominal gains; that is, both inflationary and real.

Abrdn's lifetime allowance guide contains a reasonably lucid explanation of how this all works in practice. For BCE 5A, the test on crystallised funds at age 75, see the example of "Clara".

Worth noting that it's not necessary to take this income smoothly. If you know there is a low-income year or period coming up, you could wait and make heavier drawdown withdrawals then. Conversely, you might reduce withdrawals in years where you have higher income, windfalls, and so on. (Arguably, at the extreme, if you've done nothing until age 74.5, one might even consider taking perhaps 15 years of entire nominal gains there and then, all in one go. Even if facing tax at 45% top tax, this is still lower than the 55% LTA penalty rate. Probably not sensible to wait that long before taking action to reduce the drawdown balance, though.)

[JohnB]

Oh dear, as its the scenario I will be facing in a year from now. High inflation would be a real killer, as it introduces capital gains that don't reflect increased purchasing power, and the 4 year LTA freeze will make waiting for it to start rising again before crystallising unwise. I'm already 5 years behind on unsheltered capital gains and crystallising will make the problem worse. I think I can claw it back, but its making a 7 year project a 20 year one.

[TedSwippet]

Oh dear, as its the scenario I will be facing in a year from now. High inflation would be a real killer, as it introduces capital gains that don't reflect increased purchasing power, and the 4 year LTA freeze will make waiting for it to start rising again before crystallising unwise. ...

Indeed. Although you could wait and hope that a combination of LTA inflation uplift and a huge market crash in future means you can limbo under the LTA when needed. Hoping and praying for a market crash seems like an odd thing to do, but then that's all part of the lunacy that is the LTA and its perverse rules.

Not necessarily a serious suggestion, by the way. The hoped-for crash may not appear, or may not be as deep as needed, or may not occur exactly when needed, or ...

[UrbanAchiever]

One option would be to sell one/both properties ahead of drawing on my pension so that there is no taxable income from the properties to worry about.

But what would you do with the money that releases? Unless you store it as physical cash or similar (which would be self-defeating!), wherever you invest or place it will itself generate some taxable income; dividends, interest, etc. At least until you can get it all into ISAs, and that will take several (perhaps many) years.

If your wife's earning are low, you could I suppose 'gift' this money to her. Or maybe you can 'gift' your half of the investment properties, but not sell them. I suspect which, if either, may depend heavily on your wife's other assets and earnings.

Really feels like I need to throttle back on my pension contributions to the lowest allowable to attract maximum from my employer (7% from me to get 10% from them).

That's a worthwhile match, so even if you exceed the LTA you want to keep it. Beyond that though, as you can see from the relative numbers, once you hit the LTA there may be little to be gained, and often something to be lost, by contributing to your pension beyond the optimum point for employer match.

Perhaps any additional contributions I would have made should go into a SIPP for my wife? She earns c.£16k including the property income, so pays 20% tax. So less tax advantageous going in, but given she has no pension at all, will not hit the LTA, and she'll benefit from the 25% tax free withdrawal.

Worth considering, but unless you've set up your properties as a company, the property income part of this may (I think) not count as 'pensionable earnings'.

My own approach to this has been two-pronged. Firstly, I gave up work several years earlier than planned (hurrah -- no regrets!). And secondly, I have organised my holdings so that my stocks live in ISAs and unwrapped trading account, and my pensions are now largely bonds/gilts. This damps down the gains and (some of) the volatility of my pensions, so that I don't have to face so much of a withdrawals crunch in the run up to age 75.

The LTA is a pensions planning major PITA.

Thanks for your reply.

Your comments have given me a lot of food for thought and here's my current (revised) thinking:

I was aiming to retire at 55, so 2 years before I can access my pension. However, loving your comment about how you retired earlier than planned to mitigate the LTA issues, I think I'll aim to retire at 53 instead. So I'll need to bridge 4 years from retirement to drawing my pension.

So, sell one of the properties to realise c. £250k, being careful to do this once my income for the year has dropped so I'm only paying basic rate tax to minimise CGT. Use this to live on for 4 years. It will be invested and produce some growth, but assuming zero growth, that £250k will give me a max of £62.5k pa net to live on, plus the £10k joint income from the 2nd property. There's no way we'll spend that much, plus my wife wants to keep working so another £6k pa on top of that (she works part-time self employed).

At the same time drip the max allowed into ISAs for each of us each year until its all spent or invested.

At age 57 draw 25% tax free lump sum of £250k (My updated calcs tell me even if I stop working at 53, I will still come within £50k of the LTA). This can either be dripped into ISAs which will take a long time, or be used to clear the mortgage on 2nd property and retain it for the rental income. This won't materially affect my property income tax bill as interest costs can no longer be offset against rental income for tax purposes (thanks George Osbourne). There will be c.£80k remaining of the TFLS after paying off the mortgage which can be dripped into ISAs.

I then drawdown enough from the pension to keep in the basic rate tax band. Still probably not enough to stay away from LTA though! Unless of course I do as you've done and switch my pension funds into lower returning assets.

But between now and retirement I think my best strategy is as follows:

Reduce my workplace pension contributions to 7%;
NOT put money into a SIPP for my wife - 2 reasons: 1) you are right, property income is not considered allowable for pensions, so not very much we can put into a pension for her and 2) if I'm going to retire at 53, then I don't want to tie even more up in pensions that cannot be accessed until 57. If she were a 40% taxpayer I'd almost certainly have a different view, but it's less compelling as a 20% taxpayer.
Divert all of our monthly savings into a S&S ISA (low cost index tracker) so that we have more available when I retire. I've had one since 2004 and had been paying into it for a long time until I got into the 60% tax bracket and started to pay extra into my pension instead.

Despite all of the above, it still feels like I'll have a good chunk of cash sitting outside ISAs/may well exceed the LTA/may end up paying 40% on some of my pension income (and that's before i throw in the state pension at 67!), but I guess this is a nice problem to have.

I've previously looked at gifting my half of the investment properties to my wife but it seems complicated and potentially costly. And whilst our marriage is rock solid, you can never be sure what the future holds!

[BigTim]

A fascinating thread and one I'm following as, through my situation is not as comfortable, I'm still considering how I'll strategise around hitting LTA (I'm 48 and so 9 years until I can crystallise with a DC of £500k and current annual contribs of £40k) and my wife has scant provision by comparison.

My contribution to the thread is the classic tax management line from "the Shawshank Redemption"

"Do you trust your wife?"

It seems to me that you're paying an unnecessary amount of tax on your part of the rental income split and not maximising the potential to increase your wife's pension provision/retirement income.

If you intend to remain together into retirement then the ideal income split is, of course, 50/50 to maximise your tax allowances. (I won't go into the odd situation that means that, if you divorce but stay together you could seemingly split your assets inc pensions 50/50...)

You can gift your share of the rental properties to your wife now, instantly save a chunk of tax on your combined income and simply leave them in her possession meaning her retirement income is circa £20k in today's money to balance out your... Let's say £30k (£750k*4% after taking the full £250k lump sum). In addition you can make contributions to a pension in her name of at least £6k/year (her earnings) starting now, that will build some kind of pot to draw on and again minimise your current tax.

If you do intend to dispose of one of the properties then the big question is whether one of you lived in either property for any length of time such that you can get relief on the capital gains.

[UrbanAchiever]

A fascinating thread and one I'm following as, through my situation is not as comfortable, I'm still considering how I'll strategise around hitting LTA (I'm 48 and so 9 years until I can crystallise with a DC of £500k and current annual contribs of £40k) and my wife has scant provision by comparison.

My contribution to the thread is the classic tax management line from "the Shawshank Redemption"

"Do you trust your wife?"

It seems to me that you're paying an unnecessary amount of tax on your part of the rental income split and not maximising the potential to increase your wife's pension provision/retirement income.

If you intend to remain together into retirement then the ideal income split is, of course, 50/50 to maximise your tax allowances. (I won't go into the odd situation that means that, if you divorce but stay together you could seemingly split your assets inc pensions 50/50...)

You can gift your share of the rental properties to your wife now, instantly save a chunk of tax on your combined income and simply leave them in her possession meaning her retirement income is circa £20k in today's money to balance out your... Let's say £30k (£750k*4% after taking the full £250k lump sum). In addition you can make contributions to a pension in her name of at least £6k/year (her earnings) starting now, that will build some kind of pot to draw on and again minimise your current tax.

If you do intend to dispose of one of the properties then the big question is whether one of you lived in either property for any length of time such that you can get relief on the capital gains.

Thanks for your reply.

In terms of current tax implications, as a couple we jointly pay c.£6k pa in tax on the rental income. If I gift her my share, then this will reduce our "joint" tax to £4k. A nice saving, but if I'm honest, not big enough to counter the very small risk that we may separate and I'd lose my share of the properties!

With regard to them being in her name during pension drawdown, it does look like a much more compelling idea, giving me a better chance of staying within the basic rate of tax. However, if we decide to sell one or both properties, we want to benefit from both of our CGT allowances, and cannot do that if I have gifted my share to her. And as I understand it, if she gifts my share back to me just before we sell them, HMRC will smell a rat (quite rightly!). Sadly we haven't ever lived in the properties so no CGT relief to be had there.

[BigTim]

Thanks for your reply.

In terms of current tax implications, as a couple we jointly pay c.£6k pa in tax on the rental income. If I gift her my share, then this will reduce our "joint" tax to £4k. A nice saving, but if I'm honest, not big enough to counter the very small risk that we may separate and I'd lose my share of the properties!

With regard to them being in her name during pension drawdown, it does look like a much more compelling idea, giving me a better chance of staying within the basic rate of tax. However, if we decide to sell one or both properties, we want to benefit from both of our CGT allowances, and cannot do that if I have gifted my share to her. And as I understand it, if she gifts my share back to me just before we sell them, HMRC will smell a rat (quite rightly!). Sadly we haven't ever lived in the properties so no CGT relief to be had there.

Well, in the event you separate you'll be going through a process to divide up your assets (including your pension) anyway.. But perhaps you've answered Andy Dufrane's question

CGT... yes you can use your your allowance if the ownership is shared but you'll also pay a higher rate of tax on your share of the gain after your allowance (28% vs 20%). some calcs required here as to the best option. Of course, you could also fold the property(s) into a ltd co structure and have your wife benefit from pensionable earnings. At this point I think it's not a bad idea for you to get some proper accountancy advice as to how best to dispose of/share the properties, well meaning as we fools are

In my world I am still (currently) full throttle £40k/year on my pension contribs (as much as to mitigate 40% tax) but I'm now making contribs to my wife's pension too so we have a better balance of income in retirement. If we separated... well, right now she'd take a big slice of my pension, with more of her own provision it'd be commensurately less so it works in blissful union, acrimony or conscious uncoupling scenarios

[hiriskpaul]

A fascinating thread and one I'm following as, through my situation is not as comfortable, I'm still considering how I'll strategise around hitting LTA (I'm 48 and so 9 years until I can crystallise with a DC of £500k and current annual contribs of £40k) and my wife has scant provision by comparison.

My contribution to the thread is the classic tax management line from "the Shawshank Redemption"

"Do you trust your wife?"

It seems to me that you're paying an unnecessary amount of tax on your part of the rental income split and not maximising the potential to increase your wife's pension provision/retirement income.

If you intend to remain together into retirement then the ideal income split is, of course, 50/50 to maximise your tax allowances. (I won't go into the odd situation that means that, if you divorce but stay together you could seemingly split your assets inc pensions 50/50...)

You can gift your share of the rental properties to your wife now, instantly save a chunk of tax on your combined income and simply leave them in her possession meaning her retirement income is circa £20k in today's money to balance out your... Let's say £30k (£750k*4% after taking the full £250k lump sum). In addition you can make contributions to a pension in her name of at least £6k/year (her earnings) starting now, that will build some kind of pot to draw on and again minimise your current tax.

If you do intend to dispose of one of the properties then the big question is whether one of you lived in either property for any length of time such that you can get relief on the capital gains.

Thanks for your reply.

In terms of current tax implications, as a couple we jointly pay c.£6k pa in tax on the rental income. If I gift her my share, then this will reduce our "joint" tax to £4k. A nice saving, but if I'm honest, not big enough to counter the very small risk that we may separate and I'd lose my share of the properties!

With regard to them being in her name during pension drawdown, it does look like a much more compelling idea, giving me a better chance of staying within the basic rate of tax. However, if we decide to sell one or both properties, we want to benefit from both of our CGT allowances, and cannot do that if I have gifted my share to her. And as I understand it, if she gifts my share back to me just before we sell them, HMRC will smell a rat (quite rightly!). Sadly we haven't ever lived in the properties so no CGT relief to be had there.

You may not have to give up your share of the properties as it may be legal for your wife to draw all the rental income even if you jointly hold the properties. I say "may" though as I am unsure. A few years ago my brother and I discussed investing in a rundown property. I would put up half the capital, my brother the other half. He would then do up the property, which was uninhabitable, and rent it. I did not go ahead with this, but did find that it would have been perfectly within the tax rules for my brother to take all the net rental income. I would have still paid capital gains tax when the property was eventually sold.

Anyway, something to think about and perhaps discuss on the taxes board, or ask your accountant if you have one.