My first reform concerns the taxation of marriage.
The present system for the taxation of married couples goes back 180 years. It taxes the income of a married woman as if it belonged to her husband. Quite simply, that is no longer acceptable.
This is a matter on which there has already been extensive consultation. The time has come to take action.
I therefore propose a major reform of personal taxation, with two objectives: first, to give married women the same privacy and independence in their tax affairs as everyone else; and, second, to bring to an end the ways in which the tax system can penalise marriage.
I have decided to introduce, at the earliest practicable date, April 1990, a completely new system of independent taxation. Under this new system, a husband and wife will be taxed independently, on income of all kinds. All taxpayers, male or female, married or single, will be entitled to the same personal allowance, which will be available against all income, whether from earnings, pensions or savings.
In addition, there will be a married couple's allowance, equal to the difference under the present system between the married man's allowance and the single allowance. This new allowance will go in the first instance to the husband, so that his tax threshold will not fall. But if he does not have enough income to use it in full, he will be able to transfer any unused portion to his wife, to set against her income.
This ensures that the tax system will continue to recognise marriage, as it should do. At the same time, from 1990 married women will pay their own tax, on the basis of their own income, and have their own tax return, when one is necessary. There will, of course, be nothing to stop married women from asking their husbands to handle their tax affairs, or vice versa, as before; and many will no doubt do so. But what matters is that, for the first time ever, married women will have the right to complete independence and privacy so far as tax is concerned.
In the same way, a husband and wife will be taxed independently on any capital gains they may have, with an annual exemption each, instead of one between them as now. But transfers of capital between husband and wife will continue to be entirely free of any liability to tax.
As I have said, the new system will come into force in 1990. This is much sooner than would have been possible for most of the alternatives that have been canvassed. The necessary legislation will be contained in this year's Finance Bill. The cost of this historic reform, which for the first time ever gives a fair deal to married women, will be a little over £½ billion in 1990–91.
I mentioned a few moments ago the tax penalties on marriage. It is clearly wrong that some couples should find themselves paying more tax simply because they are married. I propose to put that right.
Independent taxation by itself will remove the most common penalty—the taxation of a married woman's income at her husband's marginal rate. But there are other tax penalties on marriage, and I propose to abolish them. These changes need not await the introduction of independent taxation.
Under the present system an unmarried couple can get twice as much mortgage interest relief as a married couple. This has attracted increasing—and justified—criticism. I propose to put a stop to it as from August this year. Thereafter, the £30,000 limit on mortgage interest relief will be related to the house or flat, irrespective of the number of borrowers. This was the solution put forward in the 1986 Green Paper on personal taxation, and it was widely welcomed. Existing mortgages will be unaffected.
Another anomaly is that an unmarried couple with children can each claim the additional personal allowance intended for single parents, and thus get more tax relief than a married couple in the same position. I propose to confine them to a single additional personal allowance, with effect from April 1989.
Thus this Budget will not only, for the first time ever, give married women a fair deal from the tax system. It will also eliminate, for all practical purposes, the other tax penalties which, under the present system, can arise on marriage.