Married couples are subject to a system of independent taxation under which husbands and wives are taxed separately. This can give rise to valuable tax planning opportunities. Furthermore, the tax position of any children is important.
Marriage breakdowns can also have a considerable impact for tax purposes.
We highlight below the main areas of importance where advance planning can help to minimise overall tax liabilities.
It is important that professional advice is sought on specific issues relevant to your personal circumstances.
Setting the Scene
Married couples
Since 1990, independent taxation has meant that husbands and wives are taxed separately on their income and capital gains. The effect is that both have their own allowances, lower and basic rate tax bands for income and capital gains tax purposes and are responsible for their own tax affairs. Since December 2005, the same tax treatment applies to same-sex couples who have entered into a civil partnership under the Civil Partnership Act.
Children
A child is an independent person for tax purposes and is therefore entitled to a personal allowance and a full starting rate and basic rate tax band before being taxed at the higher rate. It may be possible to save tax by generating income or capital gains in the children's hands.
Marriage breakdown
Separation and divorce can have significant tax implications. In particular, the following areas warrant careful consideration:
• current and future tax allowances
• transfers of assets between spouses.
Tax Planning for Married Couples
Income tax allowances and tax bands
Everyone is entitled to a basic personal allowance. This allowance cannot however be transferred between spouses.
If either you or your spouse were born before 6 April 1935, a married couple's allowance is available. This is given to the husband, although it is possible, by election, to transfer it to the wife.
Joint ownership of assets
In general, married couples should try to arrange their ownership of income producing assets so as to ensure that personal allowances are fully utilised and any higher rate liabilities minimised.
Generally, when husband and wife jointly own assets, any income arising is assumed to be shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset.
From 6 April 2004, married couples are taxed on dividends from jointly owned shares in ‘close’ companies according to their actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people. For example if a spouse is entitled to 95% of the income from jointly owned shares they will pay tax on 95% of the dividends from those shares. This measure is designed to close a perceived loophole in the rules and does not apply to income from any other jointly owned assets.
We can advise on the most appropriate strategy for jointly owned assets so that tax liabilities are minimised.
Capital gains tax (CGT)
Each spouse's CGT liability is computed by reference to their own disposals of assets and each is entitled to their own annual exemption, for 2007/08 £9,200 per annum. Gains above this level are charged to tax by treating them as the top slice of income.
For 2007/08 considerable tax savings may be made by ensuring that maximum advantage is taken of annual exemptions, the starting rate of tax (10%) and the lower rate of tax (20%).
This can often be achieved by transferring assets between spouses before sale - a course of action generally having no adverse CGT or inheritance tax (IHT) implications. Advance planning is vital, and the possible income tax effects of transferring assets should not be overlooked.
In the 2007 Pre-Budget report it was announced that their will be radical reforms to the CGT system for 2008/09. The reforms include the abolition of taper relief and indexation allowance for CGT and the introduction of a flat rate of CGT for individuals of 18%. Details of the proposed changes are outlined in the factsheet Capital Gains Tax Reform. Please do get in touch for more information on how these changes will affect you.
Inheritance tax (IHT)
When a person dies IHT becomes due on their estate. Some lifetime gifts are treated as chargeable transfers but most are ignored providing the donor survives for seven years after the gift.
The rate of inheritance tax payable is 40% on death and 20% on lifetime chargeable transfers. For 2007/08 the first £300,000 is not chargeable and this is known as the nil rate band.
Transfers of property between spouses are generally exempt from IHT. New rules were introduced in the 2007 Pre-Budget report which allow any nil-rate band unused on the first death to be used when the surviving spouse dies. The transfer of the unused nil-rate band from a deceased spouse, irrelevant of the date of death, may be made to the estate of their surviving spouse who dies on or after 9 October 2007.
The amount of the nil-rate band available for transfer will be based on the proportion of the nil-rate band which was unused when the first spouse died.
A gift for family maintenance does not give rise to an IHT charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.
Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
Small gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
Gifts which are made out of income which are typical and habitual and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.
Children
Use of allowances and lower rate tax bands
It may be possible for tax savings to be achieved by the transfer of income producing assets to a child so as to take advantage of the child' ...
