Love and tax part 1: Income tax
Key points
Couples can claim either the married couple’s allowance or the marriage allowance. These are also available for civil partnerships.
The MCA is a tax reducer and can be transferred from the partner able to claim to the other spouse.
Less tax may be due on income from jointly owned assets.
On entering a marriage or a civil partnership, and living together for the first time, couples could find that they fall foul of the high-income child benefit charge.
Ahh … love and marriage... Mae West famously referred to marriage as ‘a great institution’, but then followed that up by stating ‘I’m not ready for an institution yet’. Whether a bride and groom are getting married or (a bride and a bride and a groom and a groom) or a couple are forming a civil partnership, the tax status of each individual in the union will impact a number of UK taxes; some benefitting the taxpayer and some not. Let’s start with income tax.
The first and most obvious impacts on a taxpayer’s income tax when a legal (romantic not business) partnership is entered into are the married couple’s allowance (MCA) and the marriage allowance (MA). Although both reliefs have the word ‘marriage’ in their description, they are also available for civil partnerships. The former is only available for those where the elder of the couple is turning 89 years old in the 2023-24 tax year and the couple have been married or living together for at least a part of the year, and the latter is only available for basic rate taxpayers. Couples can benefit from only one of either the MCA or the MA. Claiming both is not possible, and if the MCA is available, this is usually the most generous. Married couple’s allowance may become available
The MCA is a ’tax reducer’, which means that it is deducted, on a claim, from the tax liability of the UK resident (or UK national) partner making the claim. Although it is only available as a result of one of the couple having been born before 1935, the partner making the claim does not necessarily need to be the oldest one. For unions entered into post 4 December 2005, the partner able to claim, is the one with the highest net income (and this can change every year). Prior to the December 2005 changes, the ability to claim was restricted to only the husband. The MCA is pro-rated in the year of marriage.
Being a tax reducer, it is not therefore an amount deducted from total income like the personal allowance. Also, unlike the personal allowance, the whole of the MCA can be transferred from the partner able to claim to the other spouse. The amount, however, is always restricted by reference to the adjusted net income level of the higher earner (post 2005) or the husband (pre 2005).
The MCA gives a maximum of £10,375 tax free, calculated at the taxpayer’s tax rate and then deducted from their tax liability. For example, a 20% taxpayer with a tax liability of £3,000 could reduce this to £925 by deducting the MCA of £2,075 (£10,375 x 20%). This £10,375 is however abated if the claimant’s ‘adjusted net income’ increases beyond £34,600. For every £2 above £34,600, so the MCA will reduce by £1 down to a minimum of £4,010. The adjusted net income is the taxpayer’s total income (adjusted to add back any payments to trade unions/police organisations deducted) less losses, less any gross donations to charity through gift aid and gross pensions contributions (not net pay arrangements). Marriage allowance may become available
The marriage allowance permits one member of the legal partnership to elect to transfer an absolute amount of 10% of their personal allowance to the other partner. If the transferring partner is not using that part of their personal allowance, by passing 10% of £12,570 (the legislation allows this to be rounded up to £1,260), at 20% income tax, a £252 tax saving can be generated for the couple. The transferring spouse may be motivated by having no income for which to use their personal allowance, or perhaps the income they have is covered by the personal savings allowance or the dividend allowance. Like the MCA the MA is a tax reducer, causing a direct reduction on the tax due by up to £252. Jointly owned asset income can generate less tax
The other potential benefit to being in a legal partnership are the rules on taxing income arising from joint assets. Where couples are simply in a relationship and neither married nor in a civil partnership and they are earning income from joint assets, the income will be taxed according to a split determined by the actual ownership of the asset in question. For example, if civil partner 1 holds 90% of a let property, he or she will be charged on 90% of the net rental income. Civil partner 2 will own and be taxed on 10%. Once in a legal partnership however, the net profit will be assumed to have been earned on a 50:50 basis. The couple can displace this assumption if they wish through HMRC’s form 17, on which they can advise HMRC of their actual holding (ie: not 50:50) and request HMRC tax them accordingly.
If the couple do not challenge this, there could be advantages. For example, in the illustration above, if civil partner 1 were a higher or additional rate taxpayer and civil partner 2, a basic rate or non-taxpayer; by having the couple’s income taxed on a 50:50 basis, together, they would be paying less tax than before. This is because 40% of the joint income that was previously taxed on the higher earner of the couple (civil partner 1) would now be taxed on the lower earner (civil partner 2) saving up to 45% in income tax (depending on the level of income from the joint asset and the level of other income of civil partner 2). Consider the settlement rules and income shifting After marriage or the formation of a civil partnership, there could also be the opportunity to split income between the couple, thus saving tax, if one of the couple (or both) have their own company.
If one of the legal partners gifts shares in a company to the other, allowing the recipient spouse or civil partner to earn dividends from those shares in the future, this could be viewed by HMRC as having formed a settler interested trust. The logic behind HMRC’s challenge is that the gifting spouse or civil partner has simply transferred the shares in their capacity as a settlor, to the recipient spouse, who holds the shares as a trustee. The beneficiary would be the gifting partner as they can benefit from the income from the future dividends. The gifting spouse, therefore, despite the gift, retains the benefit of the dividends. If this kind of settlement is recognised from the transfer, the settlement rules will kick in, meaning that any dividends earned will be taxed on the gifting partner and not the recipient partner.
In the benchmark case on this point, Jones v Garnett 2007 STC 1536 (often known as the Arctic Systems case as this was the name of the company which the shares were in), the gift of the shares from Mr to Mrs Jones was indeed held to be in the nature of a settlement. However, as ITTOIA 2005, s 626 recognises, where there is an outright gift from one spouse or civil partner to the other, and this gift was not ‘wholly and exclusively a right to income’ (which the shares were not, as they had rights to votes and a share of the assets on a winding up), an exception for such a spousal transfers applies.
This allows planning between spouses and civil partners that – despite the frustration of the government at the time with reference to the outcome of the Arctic Systems case – is still available now. The risk of a change of law to prevent this has not however fully retracted. High-income child benefit charge may be payable
Unfortunately, not all impacts from forming legal partnership end up in a tax saving. On entering a marriage or a civil partnership, and living together for the first time, couples could find that they fall foul of the high-income child benefit charge.
Imagine a single father, living alone while raising his three children and earning £45,000. He would currently receive £1,248 a year for the eldest child and £826.80 for the younger child, a total of £2,074 a year. If he were to marry a wife earning between £50,000 and £60,000, for every £100 over £50,000 she earns, a child benefit charge levied on her, meaning that 1% of the child benefit, (£20.74) would be sacrificed. If she were to earn over £60,000 the child benefit would be entirely abated, and it would be better that he doesn’t elect to receive it again.
‘Partners’ for this part of the income tax legislation actually extend to more than legal partners such as married couples and those in a civil partnership and include those who are not in a legal partnership but who ‘live together as if they were’.
Summary Most of the implications from a marriage or civil partner union impact positively on the income taxation position of both the individuals in the couple. There are, however, some pitfalls that need to be considered and navigated before the marriage in order to plan successfully for the (financial side at least!) of the union.