Tax can be romantic

Monday 11 February 2008

With Valentine's day this week and 2008 being a leap year, this February will no doubt see many people take the plunge and pop the question to their loved one. But what affect will getting married or registering as civil partners have on your tax affairs and what can couples do to maximise their tax position once they have tied the knot?

What are the tax advantages of being married or in a registered civil partnership?

Since the introduction of independent taxation in 1990/91, married couples have been assessed to tax as separate individuals. This means that each individual gets their own personal allowance for income tax (£5,225 for 2007/08) and annual exemption for capital gains tax (£9,200 for 2007/08).

Couples, whether married or not, can take advantage of utilising any unused personal allowance and lower rate tax bands, by making sure any taxable, income producing investments are in the name of the lower earning partner.

Capital gains tax (CGT)

Married couples benefit from a CGT relief which allows the transfer of assets between spouses (or registered civil partners) to take place on a no gain/no loss basis. Assets standing at a gain can therefore be transferred between spouses/civil partners before a sale in order to utilise both annual exemptions.

The CGT regime is being reformed with effect from 6 April 2008 and draft legislation shows that indexation allowance (which provides relief for the cost of inflation on assets held between March 1982 and April 1998) will not be available on disposals once the new regime comes into force. In order to prevent losing this relief (which in the case of an asset held since March 1982 effectively doubles the base cost on disposal), married couples can take advantage of the inter-spousal relief and "bank" any accrued indexation allowance by making an inter-spousal transfer prior to 6 April 2008. This will work for assets that were acquired between 31 March 1982 and 5 April 1998, however the position for assets originally acquired before 31 March 1982 is not as clear. HM Revenue & Customs (HMRC) has said that it is looking at the legislation in this area as it currently appears that from 6 April 2008 the indexation allowance would still be lost, despite an inter-spouse transfer taking place before that date.

Inheritance tax (IHT)

Gifts between married couples (and registered civil partners) are exempt from IHT. However, where one spouse/civil partner is non-UK domiciled the exemption is only £55,000.

Each individual has an IHT nil rate band (currently £300,000). No IHT is due on gifts that fall within this limit. In the Pre-Budget report on 9 October 2007, the Chancellor announced that from that date married couples (and registered civil partners) would be able to transfer any unused nil rate band at the time of the first death to the surviving spouse. This means that on the first spouse's death, their nil rate band will not be wasted where some or all of the estate is passed to the surviving spouse. The legislation prevents the roll up of nil rate bands on subsequent marriages so that the amount of nil rate band that can be accumulated by any one surviving spouse is limits to the value of the nil rate band in force at the time of their death.

Whilst not a relief for the parties to the marriage, it should be remembered that there are IHT exemptions available for parents (£5,000 each), grandparents (£2,500 each) and others (£1,000) for gifts in consideration of marriage. This is in addition to each individual's annual IHT exemption of £3,000.

What else do couples need to consider?

New legislation is being introduced to catch cases where HMRC considers that income has been "shifted" from one individual to another, in order to obtain as tax advantage. This legislation is being introduced following the case of Jones v Garnett (tax story of the week archive; 31 July 207 and 10 December 2007), and will not only apply to married couples but also to any individuals not acting on an arm's length basis and who are either in partnership together or who own shares in a company and receive dividends. This is something that all couples in business together need to be aware of going forward.

Francesca Lagerberg, Head of Grant Thornton's National Tax Office says: "Many consider that with the demise of the income tax married couple's allowance in 2000/01, the tax regime does not support marriage. However, there are a variety of tax rules specific to married couples and registered civil partners that allow them to arrange their financial affairs (or make romantic gestures) without having to consider the tax consequences."

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