To receive our quarterly e-newsletter filled with the kind of news you can use, register here.
Kate Middleton & Prince William tie the knot on 29th April. It’s probably fair to say that their marriage will face few financial crises. The tax implications of their nuptials is probably the last thing on their minds!
However, for the rest of us, tax is an unavoidable fact of life, and one we neglect at our peril. It’s something we should consider at all stages of life – starting work, retiring, having children. And, of course, getting married.
There are few outright tax incentives to marriage. However, it does offer some planning opportunities, as well as some traps for the unwary. From December 2005, the same traps and opportunities apply to same sex couples entering into a Civil Partnership.
Prior to the introduction of independent taxation of married couples in 1990, husband and wife were treated as one person for tax purposes, with a wife being regarded as her husband’s “chattel"!
Under independent taxation, husbands and wives have their own personal allowances and lower and basic rate tax bands, and married couples should aim to make maximum use of these wherever possible. If one spouse is a higher-rate taxpayer and the other isn’t, transferring income-producing assets to the lower-earning spouse can mean the difference between 50% tax and 20% or 10% tax (or even no tax at all, if there’s an unused personal allowance!).
A husband and wife each have an annual capital gains tax exemption, currently £10,600, which isn’t transferable and which is lost if not used. If capital gains are on the cards, using both exemptions can therefore allow gains of £21,200 to be realised tax-free, so it’s worth reviewing the most efficient ownership of relevant assets before sales are made (bearing in mind that assets can be transferred between spouses capital gains tax-free). In addition, ensuring that gains arise, where possible, to the lower-income spouse could mean the difference between a CGT rate of 28% and a lower rate of 18%,
On a similar tack, make sure that maximum use is made of capital losses, which again aren’t transferable. If one spouse has capital losses available, and the other is about to sell an asset at a gain, the valuable asset can be transferred (without tax consequences) to the other spouse prior to sale, so that the gain when made is covered by capital losses.
Entrepreneurs’ Relief can be available on qualifying sales of business assets and family company shares (with a lifetime limit of £10 million on such gains), reducing the tax rate to just 10%. Transferring assets between spouses may jeopardise such a claim, so care should be taken not to lose any entitlement to this extremely valuable relief.
In Scotland, marriage or civil partnership doesn’t invalidate a Will. However, keeping your Will up-to-date is the only way to ensure that your assets are distributed as you wish when you die, and Wills should be reviewed after any life-changing event. If you die without a Will, the law will determine how your estate will be distributed, which could be distressing for your nearest and dearest.
Wedding gifts attract special inheritance exemptions, which could provide encouragement for family and friends to give generously. Gifts of up to £5,000 by parents, £2,500 by grandparents and £1,000 by others can be made totally exempt from IHT.
A new spouse, new home, new responsibilities, perhaps including children – take advice and consider the financial position should one (or even both) of you die.
Consider pension planning – a non-working spouse can pay £3,600 gross per annum into a stakeholder pension – and check whether existing arrangements provide a spouse’s pension following first death.
While there are no specific “tax breaks” for provision for children, starting the planning early can allow efficient use of tax-free savings breaks to build up a fund for future education costs. Using both spouses’ ISA allowances – currently £10,680 each - can build up into a respectable tax-free pot over a number of years.
Children over 18 have their own ISA allowances, while children over 16 can contribute £5,340 per annum into a cash-only ISA. The 2011 Budget provided an outline of the new Junior ISAs to be introduced from 1 November 2011, allowing tax free investment of up to £3,000 for those under 18 years of age who didn’t qualify for a Child Trust Fund.
Any income from property jointly owned by a married couple is treated for income tax purposes as belonging to them in equal shares, unless an election is made for the income to be split on the basis of the actual proportions of ownership (there are special rules for shares in close companies, which are always taxed according to actual ownership). It’s worth making sure, therefore, that any jointly held assets are taxed in the most efficient way, and that elections (which can’t be made retrospectively) are lodged where appropriate.
Sometimes, of course, the automatic 50:50 split can be beneficial. Rental income from an investment property, owned 95% by a spouse paying higher-rate tax and 5% by a spouse paying tax at the basic rate, will result in 45% of the income attracting a tax saving of up to 30% (being the difference between the higher rate of 50% and the basic rate of 20%).
Prior to the 2007 Pre Budget Report, the split of assets between spouses was crucial for inheritance tax purposes. This is no longer quite so important, as the IHT nil rate band, to which both spouses are entitled, is now effectively transferable. However, IHT should still be borne in mind when looking at the split of assets, to minimise the potential drain of long-term care costs on the estate of a surviving spouse.
Employing one spouse in a business run by the other spouse can be tax-efficient, but any salary paid must be reasonable for the duties carried out, otherwise the Revenue could argue that it isn’t paid wholly & exclusively for the purposes of the business, and so disallow it for tax purposes.
Similarly, husband & wife partnerships are popular, and can allow the split of partnership profits to make best use of allowances and rate bands.
However, the Labour Government made clear their dislike of “income-shifting” arrangements, which used companies or partnerships to “shift” income from one party to another to obtain a tax advantage. No legislation was forthcoming, but it’s possible that this issue might raise its head again at some point in the future. Such arrangements should therefore be undertaken with care, and arrangements which don’t reflect the commercial reality of the business avoided.
There are various reliefs for charitable giving, the most obvious being higher-rate tax relief for Gift Aid payments. While both spouses will have charities they wish to support, it makes sense, if one spouse pays higher-rate tax and the other doesn’t, for the higher earning spouse to make the gift and claim the relief.
If either spouse has children, and the couple aren’t already living together, entitlement to tax credits may be affected by marriage and the position should be reviewed.
If both spouses own homes prior to tying the knot, it’s crucial to review the capital gains tax “principal private residence” position. Both properties will qualify for PPR exemption for capital gains tax purposes up to the date of marriage (and will generally retain the exemption for three years thereafter), but a married couple is entitled to only one exempt residence between them. So, unless the plan is to sell the second property promptly, the CGT position needs to be considered.
If both properties are to be retained and used as homes (i.e. city flat and country house), an election needs to be lodged within 2 years as to which will be exempt going forward.
If one property is to be let, there will be an element of “letting relief” (relieving a maximum of £40,000 gain) for capital gains tax purposes. If the let property is owned jointly, each spouse is potentially entitled to the maximum letting relief. However, if a property occupied by one spouse as their home prior to marriage is transferred into joint names, the share being transferred will not attract PPR exemption on a future sale, as the recipient spouse will never have occupied the property as their PPR - so this is a case where a transfer into joint names prior to a sale may not be a good idea – the position needs to be reviewed in each case to establish the most tax efficient course of action.
If you’re thinking of tying the knot, think about the tax implications. It may not be romantic, but it could save valuable ££££s.
For advice, contact Fiona Donaldson on 0131 440 5000.