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Marriage and Tax Breaks

Tax breaks to support marriage have been examined in the press again this month.  This has come predominantly in response to an announcement by the Conservative Party proposing a £20 a week incentive for married couples.  This announcement subsequently rekindled the debate as to whether certain financial incentives should be available exclusively to married couples.

 

The number of people getting married in the UK has been steadily declining over recent years, falling from 370,022 in 1980, 283,012 in 1995 and 244,710 in 2005.  So would a tax break of around £20 a week encourage more people to get married or stay married?  Ironically, it was the Conservatives under John Major who began cutting the married couple’s tax allowance in 1994/95.  It was finally abolished by a Labour government in 2000, except for those born before 6 April 1935.

 

Other Perks?

 

Marriage still offers some tax planning opportunities which are not available to those who are not married, although increasingly the legislation refers to “partners” rather than “spouses” – the relatively new rules governing tax credits are a good example of this.

 

Previously, the general rule for jointly held property was that husband and wife were treated as equally entitled to the income, irrespective of their contribution to the source.  However, this rule was amended by Finance Act 2004 in respect of shares held in close companies.  Distributions (usually dividends) from jointly-owned shares in close companies are no longer automatically split 50:50 between husband and wife but are taxed according to the actual proportions of ownership and entitlement to the income.  With regards to other unearned income, it is possible to make a declaration specifying the shares in which the spouses do in fact beneficially enjoy the income.  The declaration must relate to both the income and the capital, and both income and capital must be shared in the same proportions.

 

The 50:50 rule can work to a couple’s advantage.  A wife may not want her penniless husband to become equally entitled to her money.  She might transfer it into the joint names of herself and her husband, while retaining a 99 per cent beneficial interest in the property.  If they do not make the necessary declaration, the income will be split 50:50 for tax purposes, thus using up the husband’s personal allowances and lower rates of tax.

 

A husband can of course simply give income-producing assets to his wife or vice-versa.  The gift must not come with strings attached or the anti-avoidance rules will bite.  In particular, the gift must:

 

  • carry the right to all the income from the asset;
  • not be “wholly or substantially a right to income”, ie the capital must be transferred;
  • not be subject to conditions, and
  • not be capable of reverting to the donor.

Assignments of employment income will not work for income tax purposes.  The successful self-employed entrepreneur, however, should seriously consider taking his or her spouse into partnership.  It is understood that HMRC no longer look at such arrangements with such disfavour as previously.  Presumably they now accept that modern husbands and wives are capable of carrying on business together.  It is nevertheless prudent to ensure that there is adequate documentary evidence both of the partnership’s existence and of the way in which it is conducted.  There should be a partnership agreement and minutes should be kept of the partnership meetings.  There should be a separate partnership bank account.

 

With regards to capital gains tax (CGT), a married couple has an annual capital gains tax exemption of £18,400 a year – compared to £9,200 for a single person.  If properly planned, this would allow a couple to share the gains from a house sale or sale of shares.

 

Spouses are even more independent of each other for inheritance tax (IHT) purposes than for income tax and CGT.  Each spouse is entitled to a full range of exemptions and reliefs.  The income tax and CGT requirement that the spouses should be living together does not apply.  For IHT purposes a couple remain married until the decree absolute.  Marriage is of great advantage in IHT planning.  The exemptions for wedding gifts are high: £5,000 for a parent of either party, £2,500 for grandparents, £1,000 for anyone else.

 

After marriage, transfers between spouses are exempt.  The only exception is where the recipient spouse is domiciled outside the UK.  There is then a £55,000 ceiling on the amount that can be transferred tax-free.  Transfers above this limit are PETs and will be wholly exempt if the donor survives seven years from the date of the gift.  In any event, after 20 years the recipient spouse will be treated for IHT purposes as domiciled in this country is she or he has been resident here for 17 of the last 20 tax years.

 

And finally...

 

...anyone tempted into marriage by a welcome £20 a week extra should bear in mind that with the average cost of a wedding running at around £17,000 it will take at least 16 years of married bliss to offset the tax break!