Marriage and the tax system

Marriage confers special advantages and in some cases disadvantages in the tax system and it is very easy to get caught in a pitfall where the marital status of clients has not been considered prior to a transaction. On the flip side there are many planning opportunities to be made use of.

Don’t forget that civil partners also count as spouses for the whole of the tax legislation.

Just checking……
Firstly, ensure that you are aware of your clients marital status - and this will include checking whether they are in a civil partnership. Assumptions are very easy to make but are not the foundation of good tax planning! Mrs Smith may be known as Mrs Smith and it is all too easy to assume that she is married to Mr Smith.

In the case of a civil partnership, you will need to find out where this was registered as the UK does not recognise all overseas civil partnerships. Perhaps it is worth checking where clients were married as well, given the example of Mick Jagger and Jerry Hall, who it turns out were not actually married at all as the Balinese ceremony they underwent was not legally binding….. Things are not always as simple as they first appear!

Capital gains tax
Married couples can only have one principal private residence (PPR) between them. This will need to be considered when clients get married if two residences are retained. If they have both previously made an election again consideration needs to be given to the most tax efficient property to choose as a residence.

One advantage is that transfers between spouses are at nil gain/ nil loss for tax purposes and this can provide tax planning opportunities. For example, where assets are to be sold, prior inter spouse transfers can ensure that more tax is paid at 18% and less at 28%. Alternatively, a spouse with capital losses can ensure that these are used efficiently.

Do beware of the pitfalls however. If the shares are shares which the transferor would be able to claim entrepreneurs’ relief on, the transferee must not sell them within a year – or the entrepreneurs’ relief will be lost. In addition, do beware the other conditions – so the transferee spouse must be an officer or employee of the company. Again, easy to overlook in the excitement of spotting a tax saving opportunity!

Nil gain/ nil loss treatment is however only available in the case of married spouses living together. If the couple separate in the tax year then the treatment extends to the end of the tax year of separation only. This can cause problems for couples who separate close to the end of a tax year when transferring property or re-arranging assets on divorce and can mean substantial CGT bills for the transferring party.

‘Bed and spousing’ is also still possible. So for example where husband has some shares standing at a gain and has not used his annual exemption for the year, but would prefer to keep the shares as an investment in the long term, he can sell the shares and realise a gain. His wife can buy the same number of shares on the same day. This would not work if he bought the shares back himself as the share matching rules would mean the gain would not be realised for tax purposes.

Inheritance tax
Gifts between spouses are exempt. However, do consider whether both spouses are UK domiciled – and remember if not, the limit is £55,000 rather than an unlimited exemption. Again, definitely one to check with clients, rather than assuming both are UK domiciled.

Married couples now have the benefit of transferrable nil rate bands, so that any unused nil rate band on the first death is up-rated and proportionately allowed on the second death. Don’t forget that one (or both) of a couple may have been previously widowed and so there may be additional nil rate band available for use. Knowing your client can be invaluable when undertaking tax planning.

If your client is getting married or has recently married do bear in mind that marriage will revoke a will. It is therefore important to check that clients are aware of this and understand the impact that this will have on the distribution of their estate in the event of their death.

If gifts of shares which qualify for business property relief (BPR) are being made, you must warn the client that if the transferee were to die within two years there would be no BPR available as they would not have held the shares for the required two years. The holding period for lifetime gifts does not transfer with the shares, despite this being an inter-spouse transfer. Failure to inform the client is a PI claim waiting to happen…..

SDLT
Imagine clients are transferring a property between themselves for capital gains tax reasons. You have checked they are married and both domiciled in the UK (so no IHT consequences). So far so good. Do check whether there is a mortgage attached to the property being transferred. If there is then this is consideration from an SDLT point of view and can result in a charge to SDLT. There is no inter-spouse exemption for SDLT.

Final thoughts….
The key to any tax planning is understanding your clients personal circumstances and it can be very easy to overlook the basics when carrying out tax planning. You should consider your client procedures and standard/ annual checklists are adequate to provide the up to date knowledge of your clients affairs that you need to provide comprehensive tax advice.

Always consider all the taxes to ensure the tax consequences have been fully thought through. It is very easy to forget one tax in the excitement of saving another!

There are many other parts of tax legislation where marital status is important and if you are in any doubt then please do get in touch.