Since it’s only a couple of days until the Valentines weekend, I thought it would be the perfect opportunity to balance out my last article on divorce with a look at how tax works in marriage and civil partnerships. I’d like to say it’s essential reading should you be thinking of popping the question, but I suspect mentioning the tax advantages in your proposal won’t be seen as desperately romantic. Still, it does no harm to be fully prepared…
Since 1990 spouses have been taxed independently and the only current effect of marriage on income tax has been the Married Couples’ Allowance. Even this has been limited only to couples where one of the partners was born before 5 April 1935.
However from April 2015 a new income tax relief worth up to £200 is being introduced. This will benefit couples where one pays tax at the basic rate and the other has some unused personal allowance. Up to £1,000 of the second spouse’s unused allowance can be transferred to the higher earner.
Still, this will not benefit couples where one pays at higher rates, or both are using their personal allowance. If you want to get a bigger benefit – and possibly one sooner than April 2015 - you will need to look at one of the Capital Gains Tax benefits below.
For Capital Gains Tax purposes it is possible to transfer assets between spouses without triggering a capital gain.
This is useful in a number of situations, but particularly so where one partner pays tax at a higher tax rate than the other. It is possible to transfer assets such as property which generates an income, from the higher tax-rate taxpayer to the lower rate taxpayer. This can be worth as much as £4,200 in tax – every year. Depending on your income this sort of planning could be worth more, immediately, than the new income tax relief discussed above.
The ability to transfer assets between the couple prior to sale also means that gains can be shared between you to minimise tax. This allows a couple to use both annual exemptions and potentially benefit from a lower Capital Gains Tax rate if one party is not a higher rate taxpayer.
You do have to take care with transfers though – sometimes transfers can make the tax worse, not better if one spouse doesn’t qualify for a relief available to the other. Also, do bear in mind that if assets are transferred between spouses then the legal ownership and entitlement changes and so advice should be sought on both counts.
Finally, it is when looking at Inheritance Tax where I can find myself in the position of pointing out to couples who are looking to leave their estate to each other some very big tax benefits of marriage or civil partnership.
This is because there is generally no IHT on transfers between married couples and civil partners. For an unmarried couple, if the first to die has assets over £325,000, the survivor could be faced with a large IHT bill. Married couples or those in civil partnerships however can generally arrange their affairs to defer any IHT bill until the second death.
The only real tax disadvantage from marriage or civil partnership arises where both parties have their own property which they live in. A married couple can only have one main residence qualifying for Private Residence Relief (PRR) at a time. So even if you continue to use both properties to live in, perhaps living apart during the week for work or treating one as a holiday cottage, only one of the properties can be classed as your main residence.
Helen Thornley, Tax Consultant