Love and the Taxman

Maybe like me you think the whole Valentine’s Day thing has just gone a little too far with constant bombarding from every sector desperate to relieve you of the contents of your wallets. 

So being the “true” romantic I paused to consider whether love and romance have any bearing on your dealings with the Taxman ! 

Frankly, our friends at HMRC have no interest in your love life until you enter into either marriage or civil partnership. If you are purely in love or living together they have no interest at all. The Taxman does not recognise ‘common law marriages’ – you must have a contract. 

So what are the consequences of getting hitched: 

Marriage/Civil Partnership

Responsibilities

Each spouse/partner is individually responsible for making a tax return of his/her own income, declaring all taxable income, and claiming his or her own tax allowances and reliefs. Each tax liability is calculated separately and each is responsible for their own tax liability. So really there is no change here. 

Allocation of income

Most forms of income can clearly be allocated to each partner e.g. employment income. Income from assets held in joint names will usually be split equally for tax purposes if they live together even if their actual holding is unequal. A declaration can be made to split income into actual ownership proportions. 

Top Tip:  It is sensible to transfer income yielding assets to the partner with the lowest income tax rate, income might then for example be taxed at 20% rather than 40%. However any gift of assets has to be an outright gift with no strings attached or else it may well come under HMRC scrutiny. 

Married Couples Allowance

This is available only where either spouse/civil partner was born before 6 April 1935 ie over 75. The maximum tax reduction available is £697 but this is restricted where net adjusted income exceeds £22,900. The allowance is given to the higher earner for marriages after December 2005 and to the husband for those prior to this. Elections can be made to alter this. 

Capital Gains Tax

Disposals of chargeable assets between spouses or civil partners are treated as taking place with the proceeds deemed to be equal to the original cost. This will result in neither a gain nor a loss. 

Inheritance Tax

Gifts between UK domiciled spouses/civil partners (whether living together or not) are exempt. This is great news and good inheritance planning will make full use of this exemption to reduce tax payable. 

Gifts on Marriage/ Civil Partnership

There are special exemptions from Inheritance Tax on gifts on the occasion of marriage/civil partnership being up to £5,000 if you are a parent, £2,500 if you are a grandparent or between marriage partners, £1,000 for anyone else. Any gift in excess of these exemptions is treated as a Potentially Exempt Transfer and will fall out of charge to Inheritance Tax if the donor survives a further 7 years. 

So is love good for your tax return:

Well you might conclude that the ideal scenario from a tax perspective is to marry someone over 75 and get inheritance tax planning straight away, receive lots of cash gifts when you get married and immediately transfer all assets to the lower earning spouse. If you are young enough you may wish to repeat this process when the opportunity presents itself   !!! 

See I told you I was a true romantic.....