The writer would like to thank Professor Stephen Cretney and Mr. David Fcldman for their comments on the draft of this article.

¹ Cmnd. 8093, 1980.

² Cmnd. 9756, 1986.

³ To save space, a detailed account of the history is not included here.

⁴ In this article “a married couple” means a married couple who are living together.

⁵ “Single people” in this context are ones who are not, and have not been, married. Separated and divorced couples are discussed below.

⁶ They will not be worse off if the wife's investment income is small and the amount gained when the husband obtains a married man's allowance exceeds the amount lost when the wife loses her single person's allowance. The couple will lose out if the wife's investment income is greater than the difference between the single person's allowance and the married man's allowance—currently £1,370 p.a.

⁷ Income and Corporation Taxes Act 1970, s.38 (first enacted in 1914).

⁸ Finance Act 1971, s.23 and Sched.4.

⁹ £20,000 – £2,425 x 27% x 2 = £9,490.

¹⁰ £40,000 – £3,795 at basic and higher rates = £13,631. The top marginal rate is now 55%.

¹¹ The relief is set out in ss.101–106 of the Capital Gains Tax Act 1979—beware of S.103(3).

¹² CGTA 1979, s.101(6).

¹³ CGTA 1979, s.44.

¹⁴ Plus the incidental costs of the disposal.

¹⁵ “Wife” = wife with whom he is living.

¹⁶ CGTA 1979, s.4(2).

¹⁷ See above.

¹⁸ CGTA 1979, ss.62 and 63.

¹⁹ ICTA 1970, s.8(1)(a).

²⁰ See below for how this works.

²¹ This is subject to what has been said above about husbands who maintain their wives otherwise than by way of covenanted payments or payments under court order.

²² The effect will be the same if the wife makes the covenant.

²³ ICTA 1970, s.437: the income will be deemed to be that of the parent settlor, but it will be investment income and so will be deemed to be the father's even if the mother is the settlor.

²⁴ ICTA 1970, s.457.

²⁵ See ICTA 1970, s.457(l)(c): the pre-1965 rule, whereby the income becomes the covcnantee's for all purposes, still applies in this case.

²⁶ As opposed to being paid to someone in trust for the child.

²⁷ ICTA 1970, s. 14.

²⁸ After deduction of his pension contributions—deducted first, so as not to complicate the calculations.

²⁹ £3,000 p.a. gross—to simplify calculations.

³⁰ £53,000 + £10,000 – £3,000 = £60,000. Deduct £3,795 (married man's allowance), tax the next £17,900 at basic rate of 27% and the balance at higher rates: he will pay top rate of 60% on approximately one-quarter of the total and the bill will be £25,381.

³¹ What is said of Mr. Smith will also be true of Mr. Jones, and so on for Mrs. Smith and the children.

³² There is insufficient space to discuss the rules applicable to the year when the separation occurs—this is a simple “before” and “after” overview.

³³ Since the decision of the House of Lords in Sherdley v. Sherdley (see below), it would actually be possible for Mr. Smith to retain custody care and control of one of the children and so be able to claim additional child relief. Effectively he would not then lose his married man's allowance. Everything else could be arranged to achieve the same tax advantages as in the present example. This would be extra tax-effective but might seem to the more squeamish reader to be taking matrimonial tax planning just a little too far. For the purposes of this example, the children have, therefore, not been split up.

³⁴ She will get a single person's allowance plus additional child relief = married man's allowance = £3,795 p.a. Her income is £20,000 p.a. (£10,000 of her own + £10,000 from her ex-husband) and the basic rate band is £17,900 p.a. She will not hit higher rate tax.

³⁵ £50,762 is £25,381 x 2: see note 30. After the separation, etc., each of the men will have income of £53,000 from which will be deducted £3,000 mortgage, £10,000 to his ex-wife, £4,000 to the children and £2,425 personal allowance. That leaves £33,575, and tax on this is £12,184. The women will each have income of £20,000 p.a. less mortgage (say, £3,000 p.a.) and allowances, and will pay tax on £13,205 at 27% = £3,565. Total tax bill for the four will be £31,498.

³⁶ (1951) 34 T.C. 178.

³⁷ ICTA 1970, s.10.

³⁸ The amount would vary with the tax year. It was £115 in 1970.

³⁹ (1939) 23 T.C. 321.

⁴⁰ (1951) 32 T.C. 38.

⁴¹ S.437 of the 1970 (Consolidating) Act was then s.21 of the FA 1936.

⁴² See casenote by Schutz, [1985] B.T.R. 306.

⁴³ [1986] Ch.311.

⁴⁴ [1986] Ch.119.

⁴⁵ G.C. 598.

⁴⁶ (1987) 2 W.L.R. 1071.

⁴⁷ Except in the relatively rare case where they are partners, or one employs the other.

⁴⁸ Unless he or she were of pensionable age?

⁴⁹ It is true, of course, that there are difficulties about distinguishing between earned income and investment income and it could be argued that any attempt to apply different rules will lead to some form of discrimination. But the personal allowance can, not unreasonably, be regarded as an allowance to cover the basic cost of going out to work. A significant merit of the rule now being suggested is that it is administratively very simple. It is true that any application of different rules to earned income and investment income may lead to distortion, but a full discussion of the difficulties would require also that National Insurance contributions be brought into the calculations. The simple solution has much to recommend it.

⁵⁰ Alternatively, the combined investment income could be added to the earned income of the higher earning spouse; but this could lead to considerable unfairness if one spouse had high earnings while the other had a substantial investment income.

⁵¹ The reduction of one-third and increase by one-half are, of course, equivalents: one-third of the gross = one-half of the net. This is the same as the distinction between “tax inclusive” and “tax exclusive.” Fractions and percentages which appear different may be the same (while those which appear the same may be different).

⁵² There is no significance in this, except that it keeps the maths as simple as possible. This is an example for lawyers and lawyers do not like sums!

⁵³ They might not be able to arrange things so that their investment incomes were identical; but, over a period of time, it would be difficult for the Revenue to prevent substantial adjustments designed to achieve virtual parity of investment incomes—very difficult even if there were an inter vivos gifts tax between husbands and wives.

⁵⁴ £6,000 in band one, £6,000 in band two and £4,000 in band three.

⁵⁵ To obtain the equivalent of bands 75% wider than a single person's bands, the combined investment incomes would be reduced by three-sevenths and the tax increased by three-quarters.

⁵⁶ The gainers would tend to be those whose pre-marriage investment incomes were substantially dissimilar, the losers those who had, before marriage, large but approximately equal investment incomes.

⁵⁷ There is much to be said for abolishing the relief altogether but there are serious complications. It is probably fairer, and certainly politically more expedient, to phase it out; and an arbitrary ceiling which is not raised in line with inflation does assist in this, though it brings with it all sorts of complications.

⁵⁸ It could be provided that a married woman could not set her personal allowance against investment income (as under the present system) but it has been suggested above that this leads to unfairness as between married and unmarried women and would be a potential disincentive to marriage.

⁵⁹ See para. 3.19: “In principle, transferable allowances arc neither an incentive nor a deterrent for married women seeking work.”

⁶⁰ The expression used by the I.F.S. W.P. 71.

⁶¹ See the I.F.S. W.P. 71 (Symons and Walker) and the I.F.S. Commentary on the 1986 Green Paper by Morris and Stark.

⁶² This might seem over generous and would lead to opportunities for tax avoidance, but the avoidance of so inequitable a tax (if the tax survives) would lead to no great injustice.