Royal Wedding highlights – The taxation implications of marriage
In light of what maybe is the second wedding of the century (After William and Kate in the UK at least), David Truman, head of the private clients practice at accountants Menzies LLP, examines the tax planning which the royal couple should consider both before and after their nuptials.
In recent years a new tax break for marriage was introduced but at £238 per year this is not likely to be of great relevance for many, especially those born with a silver spoon in their mouth. With an average wedding cost of £33,884 for non-royals, it will take 142 years to recoup the cost of the wedding.
Some important considerations for Prince Harry and Meghan Markle and for all others considering marriage in the near future, are as follows:
- Wills
- Equalisation of Income, Capital Gains and Inheritance Tax
- Joint Bank Accounts
- Pre-Nups if it all goes horribly wrong
Wills
Marriage automatically invalidates any will planning which single individuals may have made. It is therefore important that newly married spouses ensure that they make new wills to avoid the potential pitfalls of intestacy.
In the event of Harry dying without a valid will there would be the future possibility of his former sole assets passing to members of Meghan’s family (Balmoral? Sandringham?) or her family’s business becoming by royal appointment. It is important for these reasons to carefully discuss transferring assets into joint names.
It is important for newly-weds to write wills to take account a variety of potential circumstances and to ensure (generally through use of trusts) that family assets don’t end up in the hands of future spouses and their potentially dysfunctional families.
Equalisation of Income
It is important to ensure both spouses use up their personal tax allowances. From April this year, this will be £11,850 for people up to 65. If one spouse is working and one is at home with the children or performing unpaid Royal duties, it makes sense for investments to be held in the name of the non-working spouse. This will apply to bank and building society deposits and income from rental property they own.
The amount of income you can earn before you become a higher-rate taxpayer drops from £46,350, giving a £34,500 band available to each spouse with only 20pc income tax applying. So, if you have one spouse paying higher-rate tax and the other not earning or a basic-rate taxpayer, it makes sense for some investments to be transferred to maximise the income taxed at basic rate and to qualify for the interest and dividend exemptions. Equity investments come into the picture because dividends can suffer higher-rate tax, effectively at 32.5% of the dividend.
Meghan recently retired from acting (in anticipation of joining a family firm) and so there will presumably be some scope for Harry to transfer assets to her to make use of her lower tax bands. The added advantage is that transfers between spouses are not taxable events for either capital gains tax or inheritance tax. Any transfer would need to be a “no strings attached” transfer to avoid the attentions of HMRC (His Mothers Revenue and Customs).
Care would have to be taken as Meghan is presumably still a US citizen and probably also non-UK domiciled and will likely of course be continuing to receive royalties from her historic acting career.
So a transfer of assets to ensure you use both parties annual capital gains exemption, currently £11,700, would seem a sensible move.
Joint Bank Accounts
Married couples need to be careful when setting up joint bank accounts. HMRC will treat the income from these as equal unless steps have been taken to legally register the basis on which the account is held. If you want to have a joint account, but for your spouse to have the majority of the income, you need to have a legally binding document to show that the ownership has changed. This can be achieved by completing HMRC form 17.
Pre-Nups
Alas there is some form amongst the royal line (particularly those in Tudor times) for marriage breakdown. It is no longer possible to behead an errant spouse or send them to the Tower but it is important to plan for the sad possibilities in days when 1 in 3 marriages end in divorce. Harry’s father quite publicly did not enter into a pre-nuptial agreement but the legal situation has moved on in the last 30 years.
Historically in the UK, pre-nuptial arrangements have not been recognised in the UK. The UK is a popular place for divorce in light of its starting position of a 50:50 split of assets on divorce. Following an important case in this area (Radmacher) the UK legal system has been opened up to the possibility that pre-nups will now be recognised to a greater extent in the UK courts. To date they been a factor which could be taken into account, now it is possible that they may be legally binding.
The benefit of a pre-nup is that pre-existing wealth can be protected from being automatically added into the pot and potentially transferred to a departing spouse. This is particularly relevant where you have spouses with greatly differing estates (both now and following future inheritances). While no-one would consider Meghan to be poor there may be some consternation if she were to get her hands on the crown jewels.
From Meghan’s perspective it would be important to ensure that any pre-nup provided protection in the event of divorce for her and any potential children who would of course be potential kings or queens.
David Truman
Private Client Partner
DTruman@menzies.co.uk
+44 (0) 207 3875868