From time to time, clients raise the question “is marriage a good deal from a tax perspective?” Indeed, advisers have probably been responsible for thousands of marriages over the years, although possibly also for the continuation of couples remaining unmarried.
Various tax changes have now reopened the question about whether it still stacks up as a fiscal proposition. The short answer is “yes”, it still makes sense for most people most of the time. But there are certain new drawbacks for some.
Marriage and civil partnership are treated the same for tax purposes, so I am going to use “spouses”, “marriage” or “married” to cover both states.
The transferable marriage allowance
One relative novelty intended to make marriage more attractive is the transferable marriage allowance. But this product of the coalition government is unlikely to encourage many people to tie the knot.
The marriage allowance enables you to transfer £1,150 of your 2017/18 personal allowance to your spouse. The possible tax saving is 20 per cent of £1,150: £230.
The spouse giving up a tenth of their personal allowance should be be a non-taxpayer who can’t therefore use their allowance. The recipient who can use the allowance should be a basic rate taxpayer with income of between £11,500 and £45,000 (normally £43,000 in Scotland).
The marriage allowance is for people born after 5 April 1935. Older people may get the married couples allowance as a deduction against tax payable at 10 per cent of up to £8,355 but, as it is part of the age allowance structure, it is tapered out at the rate of £1 for every £2 of income over £28,000 in 2017/18.
So the income tax marriage allowances set up to encourage marriage or civil partnership do not provide serious incentives. Perhaps it is just a matter of sending out positive signals.
Nil rate bands
That said, when it comes to the capital taxes, the advantages of marriage are very real indeed. For example, transfers between spouses are free of inheritance tax, unless the recipient is not domiciled in the UK. That alone has led many people to get married even if they have lived together for many years in unmarried contentment.
Another IHT advantage of marriage is the inheritable nil rate band and now also the residence nil rate band.
For instance, Peter dies this year leaving his surviving unmarried partner Susan a £900,000 estate, including a £500,000 home. This will use up his nil rate band of £325,000 and his residence nil rate band for the current year of £100,000: providing a total of £425,000 free of IHT to Susan. The rest will be taxed at 40 per cent. When Susan dies, she will just have her own nil rate band to use against her taxable estate.
But if Peter and Susan were married, the estate would be tax- free on passing from husband to wife, and Susan would inherit Peter’s unused nil rate band and residence nil rate band. That would be a very valuable tax benefit for her heirs – worth at least 40 per cent of £425,000 at this year’s levels.
Capital gains tax
Capital gains tax also mostly favours marriage. Each spouse is taxed separately but there is no CGT on gifts between them – though the recipient takes over the donor’s base cost for calculating any future gain on disposal. This is the famous “inter-spousal rollover relief”: the only known joke in the tax canon.
However, when it comes to home ownership, the tax position of married couples can be less attractive in some important respects and can provide a serious disincentive.
The main drawback of being married is that a couple can only have one main residence between them. So a couple who has two homes between them pre-marriage can choose which is to be their joint main home but the other property will start building up the potential for taxable capital gains on disposal from the date of it ceasing to be a main residence. Do not forget the top rate of 28 per cent CGT can still apply to property gains.
The famous ‘inter-spousal rollover relief’: the only known joke in the tax canon.
What is more, the recent changes to stamp duty land tax (in Scotland, land and buildings transactions tax) have introduced further penalties for married couples buying more than one home. Two unmarried people can each buy a property without paying the extra 3 per cent property transactions tax that now applies to purchases of second properties.
But a married couple can only acquire one property – any further acquisitions will be subject to the 3 per cent additional levy on values above £40,000.
With this in mind, anyone thinking of getting married and also buying a second property should buy the home before the wedding to avoid the extra charge.
But otherwise, the tax system is more or less neutral, with spouses taxed separately on income and other aspects of CGT. What is more, most – though not all – of the pension difficulties have disappeared for unmarried couples. So the main financial penalty of being married is probably now the potential cost of divorce.
Danby Bloch is chairman at Helm Godfrey and consultant at Platforum