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Family taxation - returns from the grave?

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26th Aug 2005
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Independent taxation for married women has barely had time to register. So why are there are now mutterings for a return to family taxation. Simon Sweetman reports

In 1991 the Conservative government announced that it would right a great wrong and would end the 19th century taxation treatment of families as a husband and wife unit, introducing full independent taxation for married women. There was little opposition to the move, seen as sensible and logical at the time, and it duly became law. Why then are there now voices suggesting ' however cautiously ' that we might go back to taxing families as a unit?

At the time, there were some minor downsides to the new legislation ' married women who were in paid work and supporting a house husband (there were not many of them at the time, but some) lost their husband's personal allowance; and trading losses could no longer be transferred between spouses. It was accepted that there would be some scope for avoidance as a result of the transfer of assets to equalise incomes. The issue has become live again thanks to the revival of the settlements legislation ' for consistency the word "spouse" might have been removed from that chapter of the Taxes Act at the time, as Mr Justice Park suggested in Jones v Garnet.

Of course the reform was fudged. Genuinely independent taxation would have put spouses on the same footing as other individuals, removed the right for spouses to transfer assets for CGT at no gain, no loss; and eliminated the spouse exemption from IHT.

By 1991 the concept of the nuclear family was already on the rocks. Since then the notion of what constitutes a family has continued to fragment - to the extent that we cannot now rely on a marriage certificate as certifying a family. Although the Revenue continues to use the ill defined phrase 'living together as man and wife' when it needs to (generally in the context of marital separation), to return to the old ways under which a wife's investment income was taxed as if it belonged to her husband would simply draw a distinction between married and unmarried couples and could have no justification.

Neither would it encourage people to sign up for civil partnerships, which, at the moment, are treated in exactly the same way as marriages.

The issue that has caused the question to raise its head again is tax credits. Some of the problems ' and certainly much of the complexity of the tax credit system ' are caused by the need to consider family income rather than individual income, as assessed for other tax purposes. Since tax credits are paid on the basis of need, there is some logic to this position ' if a wealthy man employed his wife on the minimum wage and she then claimed tax credits, it might not look too good. There was also some logic to the position that said that this was a benefit best delivered by the Inland Revenue. But the two logical decisions still do not fit well together. Perhaps it is significant that - thanks to PAYE - the Revenue is used to what are effectively self correcting systems.

But for tax credits, of course, traditional marriage is not the issue : the issue is financial support, and if the state is going to subsidise child care then it needs to know who needs to be subsidising. If tax credits are going to be a continuing feature of our tax system ' and it is hard to see how they could be withdrawn politically when so many people benefit from them ' then somehow we need to align the returns.

What the Revenue does not want to do is take on the role of snooper that the DSS used to play, trying to spot whether people are cohabiting. Could we then move beyond the notion of civil partnership to allowing people to choose whether they are to be taxed as individuals or as a family unit ?

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By tonyleigh
03rd Sep 2005 08:39

Family taxation seems fairer
Separate taxation can lead to the anomaly where two families with the same gross income pay different amounts of tax. Both wage-earners on £30k per year: basic-rate tax only. One on £52k a year, spouse on £8K, and a large wodge goes in 40% tax. A consistent tax regime for families, or the ability to transfer excess income to a lower-taxed spouse could help eliminate this.

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By samelkin
31st Aug 2005 12:07

School age?
I agree with most of what you are saying, although could not understand why you would restrict the 'family taxation' to those with school age children.

Surely those with children younger than school age are more likely to have one non-working partner?

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By deanshepherd
01st Sep 2005 10:02

Under 16's

I think Simon was probably referring to children not exceeding school age as oppose to children not old enough to attend school yet.

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By Simon Newark
30th Aug 2005 12:36

Choice is sensible and logical
I have been an advocate for being able to choose between individual or family taxation for years now. Never had a sensible reply from the Government when I have raised my thoughts.

It's very simple really. Under individual taxation, a family with a higher-rate single wage-earner and a non-working spouse will lose out by losing the spouse's personal allowance. Whereas, under family taxation, two lower-rate wage-earners might find themselves forced into the higher-rate tax band if forced to be taxed as a family unit. Neither forced option is fair, yet both result in the Treasury trousering more tax than could otherwise be the case.

Given a choice, a taxpayer or family could choose on an annual basis whether they wanted to be taxed individually or as a family unit. Each would be different, with the arithmetic determining the best answer for each circumstance. If the Government wanted to limit the revenue cost, they could easily restrict the ability to choose family taxation perhaps to those family units with school-age children (to reflect the valuable and unpaid contribution that non-working spouses play in bringing up children). At present, such actions are penalised if the single-wage earner pays higher-rate tax by losing the spouse's personal allowance, yet for such things as tax credits, the family's income is taken into account, not just the main-wage-earner's. A case of the Government having its cake and eating it.

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By AnonymousUser
31st Aug 2005 13:50

I agree
I second that, from a selfish point of view. I am a high rate earner supporting a stay-at-home wife looking after my youngsters.

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