Marriage and tax - are you using the benefits?

Friday, February 12, 2010 | Posted by: Francesca Lagerberg
Categories: Personal, Protecting your wealth | Tags: tax, Francesca Lagerberg, capital gains tax, inheritance tax, income tax, tax manifesto, marriage, saving, transferable allowances, marriage and tax, tax saving, tax benefits

Marriage and tax is becoming an increasing area for debate as the political parties clash heads over whether the tax system should recognise marriage. So why do people think the system is not working, what tax breaks do you currently get when you’re married, and how best can you utilise them?

Leaving aside the contentious issues surrounding marriage, why has marriage and tax breaks become an issue? Increasing tax reliefs for being married or in a civil partnership is being pushed by one party as promoting the stable family unit. Many years ago married couples were taxed as one unit, but the current tax system is fundamentally levied on an individual basis. However, many benefits such as child tax credits are based upon family income and perhaps this is where the perceived inequality lies. All too often, couples at the lower end of the income scale lose out significantly on the benefits even if they cohabit.

Although the last few decades has seen a gradual erosion of the tax benefits of being married, there are still tax reliefs available. So what are they?

Capital gains tax (CGT)
For CGT purposes, any inter-spouse transfer of a capital asset is at no gain no loss. This means that no CGT will arise when you transfer a capital asset to your partner. So a simple bit of planning could be to transfer an asset, say part of a shareholding, to your partner. If you and your partner both sell your respective shares then you could effectively utilise both of your annual CGT exemptions, potentially creating annual CGT savings of £1,818.

If you are disposing of a business, with advanced pre disposal planning, you may be able to utilise not only your entrepreneurs’ relief lifetime allowance, but your spouses as well, which could create tax savings of up to £80,000.

Inheritance tax (IHT)
The greatest tax benefit for married couples is around succession. For IHT purposes, any asset transfer to your spouse is an exempt transfer both in life and on death. In addition, any unutilised nil rate band on death can be transferred to the surviving spouse. This gives married couples a whole host of simple planning options that just aren’t available to unmarried couples. My colleague, Sue Knight, goes into more depth about IHT planning in her previous post Five ways to reduce your inheritance tax.

Income tax
For the vast majority of married couples there are no longer any specific income tax reliefs. However there are some planning options available for married couples based around the premise that two is better than one. For example, it is possible to transfer savings and investments to your spouse to utilise their personal allowance and rate bands on the income received, as discussed by Sue Knight in another post 10 strategies for tax planning in 2009. This may become more important with the introduction of the 50% rate band and the personal allowance taper, as a couple can reduce their tax bill by 10%, by balancing their income to the spouse earning less than £100,000.

This practice is sometimes known as “income shifting” and it can be targeted by HM Revenue & Customs (HMRC) where it has powers to stop couples from arranging their tax affairs in the most efficient way possible if this runs contrary to anti-avoidance legislation. Therefore care must be taken and you should seek professional advice before undertaking any of the measures mentioned here.

The future
The Conservatives are proposing to recognise marriage in the tax system and recent press reports indicate that they may introduce a transferable income tax personal allowance, an idea we considered in our Tax Manifesto, to help offset the cost of childcare in the economic downturn. In reality this is a small step to include marriage in the UK tax system if you compare us to other EU countries who tax married couples as a single unit.

However, the debate of whether recognising marriage in the tax system would genuinely help hard working married couples, or is just an attempt at social engineering, is probably best left to the voting public.

Visit Grant Thornton’s Tax Manifesto web page to find out more about our proposals for pragmatic tax changes following the 2010 general election. The Tax Manifesto combines economic analysis undertaken in conjunction with Lombard Street Research with the solicited views from a business community of 500 UK finance directors.

Read Francesca Lagerberg’s previous posts on tax issues.

Read more posts on Protecting your wealth.

Or read more posts in our Personal category.