Making allowances for your partner: Do tax and marriage go together like a horse and carriage? Your marital status can save you money, says Andrew Bibby

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The Independent Culture
THE confetti flies, the video cameras roll and the limousine pulls away for the start of the honeymoon. Another wedding - and another couple who will have to remember to tell their tax office.

The Inland Revenue is very interested in marriage, although historically it has been more interested in the groom than the bride. It has taken many years for married women to gain the right to call their money their own - more than a century after the pioneering 1882 Married Women's Property Act, the tax system still assumed that a wife's income belonged to her husband. Only since 6 April 1990 have husbands and wives have been taxed independently.

Fiscal equality has still not arrived, however. The married man's allowance may have been renamed the married couple's allowance, but is allocated automatically to the man. Women can claim a 50 per cent share (or both partners can together elect for the full allowance to go to the wife), but only if they tell the Inland Revenue first (using form 18).

If this no longer seems a cause for comment, it is because the married couple's allowance is heading for extinction. Previously, the allowance (frozen for four years at pounds 1,720) could be set against your highest rate of tax.

As from the current tax year, however, it is restricted to 20 per cent tax relief, meaning married couples will this year be able to save pounds 344 in tax. Next year the allowance falls further, to 15 per cent of pounds 1,720, or pounds 258.

The allowance is tapered in the year couples actually marry, so that while couples who married between 6 April and 5 May are entitled to the full pounds 1,720, anyone marrying in the weeks up to 5 June, for example, will find the allowance shrinks to pounds 1,577. Marry on the last weekend of the tax year, and you will scrape in with an pounds 144 allowance - and save a little less than pounds 29 in tax.

Couples who choose to live together rather than marry miss out on this wedding present from the tax system, although an additional personal allowance (pegged to the same level as the married couple's allowance) becomes available as soon as children arrive.

In general, cohabitees are treated less kindly under the tax rules (although some are continuing to benefit from the double mortgage tax relief which was available to them before August 1988. This perk disappears if you move house, or - ironically - if you get married).

Husband and wife may now be treated independently for income tax, but are still treated as a single financial household in some key respects. Transfers between spouses are free of Capital Gains Tax (the partner who receives an asset is treated as having acquired it at the original time and price of purchase), and are also exempt from Inheritance Tax.

This raises an opportunity for couples to reduce their combined tax bill. For example, it make sense to try to ensure that both partners' personal tax allowances are fully utilised. This may not be the case if only one partner is working, when it could be worth transferring ownership of investments and savings into the other person's name, so that the tax due on investment interest can be set against their allowance.

Much the same result can be achieved by simply informing the Revenue that one partner owns a greater share of jointly held assets than the other.

In general, unless you tell your tax office to the contrary, you are treated as owning joint property equally and are taxed on half the income accordingly. If you hold joint property in unequal shares, send in form 17 to the Revenue. The same sort of calculations arise if one partner is paying 40 per cent tax whilst the other is a standard-rate taxpayer. However, any transfer of ownership in assets means just that - a point which will become all too clear if the relationship subsequently ends in a messy divorce settlement.

The tax system is rather old-fashioned when it comes to relationships, preferring to do its bit to reinforce the virtues of a properly wedded (and of course heterosexual) conjugality. Marriage is the one major occasion when the tight Inheritance Tax rules on gifts are relaxed. Parents can give pounds 5,000 to the couple free of restrictions, grandparents can make gifts worth up to pounds 2,500, whilst everyone else has a pounds 1,000 limit.

(Photograph omitted)

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