POLITICIANS have once again been talking about incentivising marriage through the tax system. This has made me reflect on the sometimes conflicting signals the tax system can generate. While there are already many ways in which a married couple or civil partners can save tax, there are other ways in which the tax system actively penalises them.

Let’s look at the positive things first. Spouses and civil partners can transfer assets between themselves free of capital gains tax (CGT), free of Stamp Duty Land Tax (SDLT) – but beware situations where there is a loan secured on an asset - and free of inheritance tax (IHT). This can enable them to reduce their tax liabilities in ways that an unmarried couple cannot. Carefully planned inter-spouse or civil partner transfers can achieve particularly significant CGT savings where losses or business assets are involved.

There are also some ways in which the tax system treats spouses and civil partners in a completely neutral way. Any couple can, for example (subject to SDLT and CGT considerations), split ownership of income producing assets to make maximum use of their personal income tax allowances and basic rate bands. Doing this can yield substantial savings, especially where there is significant higher rates exposure.

Lastly there are ways in which the tax system treats married couples and civil partners more harshly than unmarried couples.

The most marked examples are where tax liabilities increase when a person’s “associates” or “connections” have to be taken into account. An unmarried couple will often have significantly more scope to take advantage of the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme or to trade through separate companies tax-efficiently than a married couple or civil partners.

In some situations an unmarried couple might also be able to claim the benefit of CGT principal private residence relief on two properties where a married couple or civil partners could only claim one.

In short, the tax system sends completely conflicting signals about marriage and one new – and very small - tax break is not going change that.

So what conclusion do I draw from all this? Not an original one, but one that I have drawn many times and that is that there is no logic in tax and that to make the best of the reliefs the system offers, there is no substitute for sound professional advice.

 

*Paul Aplin OBE is a tax partner with A C Mole & Sons and chairman of the Technical Committee of the Institute of Chartered Accountants in England & Wales Tax Faculty; you can follow him on Twitter @PaulAplinOnTax.

He and fellow tax partners Amanda Gunter and Paul Kingdom can be contacted on 01823-624450.