To marry or not to marry

Last month, the Daily Mail carried the headline “Ed Miliband: I didn’t dodge £135,000 capital gains tax over my three homes”

At the heart of the story (which was carried by all the national newspapers) was the rule that, while married couples can have but one principal private residence for the purposes of the CGT exemption that covers our homes, an unmarried couple (like Mr Miliband and his partner, Justine Thornton) can have one each.

And, as a home is treated as your principal private residence in the last three years of your ownership of it, even if you’ve bought a replacement in the meantime, an unmarried couple could technically, at any one time, have four properties between them, all qualifying for CGT free Principal Private Residence status.

So, are our tax laws adding yet another incentive to couples not to marry in a society which is currently seeing the lowest number of marriages recorded since 1895 when the population of the UK was almost exactly half of the current figure? Not really. The CGT positionthat Mr Miliband finds himself in is about the only instance where unmarried couples are treated more favorably than persons who are married. Indeed, in tax terms, marriage remains a much better option.

Although married persons are, like their unmarried counterparts, taxed independently, the tax breaks available to married personas enable the family finances to be managed more effectively. For example, transfers between husbands and wives are free of CGT which makes for easier exploitation of a double annual exemption.

Inheritance Tax, however, is the duty where being married (or not) has, by far, the greatest impact. Gifts on death to a surviving husband or wife are tax free (”the spouse exemption”). Tax is deferred until the second death, when assets, generally, pass to the children. Unmarried couples take a double tax hit - on both the first and the second death and the figures involved can be massive. Although couples should marry for love, not money, the IHT spouse exemption has, in many cases, tipped the balance in favourof marriage. “Death bed” marriages, as a means of saving substantial amounts of tax, are not uncommon.

Reaping the financial benefits of the spouse exemption demands that couples make wills, especially when the children are under 18. Relying on the intestacy rules that apply where there is no will means that a substantial part of the estate, on the first death, will pass into a trust for the children. If the share passing to the children exceeds the IHT nil rate band (currently £325,000), the balance will be charged to IHT at 40%. And trustees for childrenare not permitted to enter into a deed of variation after death to redirect assets to their surviving parent to save the tax.

Tax bills on intestacy have seen many a family home sold to raise the funds to pay the tax, or a surviving husband/wife having to sue their spouse’s estate for reasonable financial provision.

For more information on this and any other tax issue, contact Jim Sawer.

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