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Husband and wife
For all tax purposes, now, we think, you could equally read ‘civil partners’ for ‘husband and wife’ in what follows.
Inevitably in a magazine based on tax planning, we have to look at the question of whether our tax system favours getting married (or forming a civil partnership) or not, regardless of moral considerations. In fact, the position isn’t at all clear cut. It’s not so much that the tax system provides some encouragement to marriage and some encouragement to ‘living in sin’. It’s more a case of the tax system encouraging some people very strongly in one direction and other people very strongly in the other. So let’s do a round-up of some of the commonest differences.
Capital gains tax
CGT is a bit ambivalent about married couples. On the one hand, there is complete relief from the tax for assets disposed of between spouses, even if they are sold for full value. Any such disposal is treated as taking place at a ‘no gain, no loss’ value.
On the other hand, there’s a very restrictive rule which says that a married couple can only have one, CGT-exempt, main residence between them. Exactly the same couple, without the marriage certificate, could have two main residences, of which no doubt one would be their actual main residence and the other a nominated main residence.
Inheritance tax
Inheritance tax (IHT), on the other hand, is unequivocally pro-marriage/civil partnership. Transfers between spouses and civil partners are completely exempt from IHT in almost all cases (the exception being where the transferee spouse is non-UK-domiciled). Where a person does not use up their whole, approximately £300,000, nil-rate band on death, because the estate is either less than that figure in value or because some of it has gone to the surviving spouse and is therefore exempt, the unused proportion of nil band can be carried forward and used by the surviving spouse on their subsequent death.
So if IHT were a significant issue, and particularly if the estate would be outside IHT if you took two nil bands into account, marriage has definitely got to be a good idea.
Income tax
There used to be an extremely powerful disincentive to marriage in the income tax rules, because husbands’ and wives’ incomes were aggregated and could pay a lot more tax, as a result, than the same incomes in the hands of a non-married couple, because of the combined incomes potentially going into the higher rate of income tax. All that was fortunately done away with by independent taxation nearly twenty years ago, so now income tax is, generally speaking, neutral between married and unmarried couples.
There is one major exception, however, which must be an anomalous survival from the old days, when it was assumed that a couple would marry as a matter of course.
This exception is in the so-called ‘settlements’ rules. The settlements rules tax a person on income he hasn’t received, if it has been transferred by him to someone else in circumstances such that he might be expected to benefit or his spouse might be expected to benefit. So if you formed a trust, say, in which your wife was a beneficiary, the trust income is treated as if it were all yours, because your wife is effectively treated as if she were the same person as you for these purposes. If, on the other hand, she weren’t your wife, but merely the woman you lived with, this settlement rule wouldn’t apply. The justification for this? We can’t think of any!
Corporation tax
Like income tax, the corporation tax rules are, if anything, unfavourable to marriage. If you have limited companies which are owned by spouses, these are treated as being ‘associated’ for the purposes of corporation tax.
For example, if the husband owns A Limited and the wife owns B Limited, each of those companies has a threshold of £150,000, above which profits stop being taxed at the small companies’ rate of 21% and suffer a tax rate of nearly 30%. This is because the two companies, being controlled by husband and wife and therefore ‘associated’, share out the £300,000 small companies’ rate threshold between them.
In contrast, if the two of them were not married, the companies wouldn’t be associated and they would each have a £300,000 21% corporation tax band.
‘Common law’ marriages
Not so long ago, someone took a case that hung on the question of whether a so-called common law marriage was a marriage for tax purposes. Almost inevitably, the judge threw out the case, saying that you were either married or you weren’t. So, for better or worse, at least unmarried couples know where they are.