By Michelle Stevens

With women today breaking down salary barriers and rivalling men in the millionaire stakes, it is hard now to believe that until 1990 married women were generally not taxed independently but that their husbands were in fact responsible in law for the tax matters of their wives and were required to report their income, in addition to their own.

However, since the introduction of independent taxation in April 1990, a husband and wife have been taxed separately and are therefore required to report their income and capital gains individually. Yet, despite independent taxation, there are a number of benefits from a tax perspective that being married or having entered into a civil partnership have.

Everyone is entitled to a personal allowance¹, together with lower and basic rate tax bands that are not transferable.  However, it is still possible for a married couple or civil partners to organise their financial affairs to maximise the utilisation of these and therefore minimise their total tax liability as a couple.

"If one spouse/civil partner does not work, income generating assets could be transferred into their name, with no capital gains tax on transfer."

Married couples and civil partners are usually treated as owning jointly held assets 50:50 for income tax purposes.  It is however normally possible for the couple to make an election specifying that an asset is held in different proportions, in addition to which, any transfer of assets between spouses or civil partners who are living together are treated as being made on a 'no gain/no loss' basis for Capital Gains Tax (CGT) purposes. This can therefore provide the opportunity to ensure that both spouse's/civil partner's personal allowances and lower and basic rate tax bands are utilised, and allow assets to be transferred without an immediate tax charge, enabling couples to also make use of their CGT annual exemptions.²

For example, if one spouse/civil partner does not work, income generating assets could be transferred into their name, with no capital gains tax on transfer, to enable them to utilise their personal allowance and lower and basic rate tax bands.  Such property transfers do however need to be genuine 'no strings' attached gifts to be effective for tax purposes.

There is however one potential major capital gains tax disadvantage of being married or in a civil partnership.  This relates to the 'principal private residence exemption'³ for CGT purposes.  Under UK tax law, a married couple or civil partners who are living together can only have one 'main residence' and this must be the same for both members of the couple. Where a couple have two properties which are used as residences, their main residence will usually be determined based on the facts and a CGT liability could arise on the sale of the second property.  It is however possible to submit an election within two years of acquiring the second property to specify which should be regarded as the principal private residence.  This can then be varied at a later date as required.

Finally, any gifts between UK domiciled spouses or civil partners during their lifetimes or assets left upon death to each other are usually not chargeable to inheritance tax.

It is also important to note that marriage or entering into a civil partnership invalidates an individual's will and this should therefore be reviewed upon such an event.  In particular, married couples and civil partners should ensure that their wills are tax efficient and assets are organised to enable both parties to utilise their nil rate bands for inheritance tax purposes.

In view of the complexity of tax law and the existence of anti-avoidance legislation, professional advice should always be sought before undertaking any tax planning. However in view of the potential benefits it is worth all married couples and civil partners looking at their positions to ensure that they are making the most of those benefits.

1 Personal allowance:  A deduction available to reduce taxable income.  For an individual under 65 years old, the personal allowance for 2007/08 is £5,225.

² Annual exemption:  For 2007/08 the first £9,200 of an individual's gains are exempt from capital gains tax.

³ Principal Private Residence exemption: Where a property has been an individual's or couple's main residence throughout ownership, any gain arising on disposal will be exempt from capital gains tax.