Section 3: Families, married couples and children

3.1. Families, married couples and children

3.2. When a married couple lives together

3.3. Divorce and separation

3.4. Unmarried couples liing together

3.5.  When an unmarried couple s cohabitation ends

3.6. Children

3.7. Death in the family

3.1. Families, married couples and children

In general, married couples and children are taxed as individuals and not as a family. Until 1970, married couples were jointly taxed in the husband’s name and it was the husband’s responsibility to pay the tax. This meant that women did not have independent tax status. Children under 15 years were jointly taxed with their parents. This family tax applied primarily to the actual tax calculation.

As a rule, joint family taxation no longer exists.

Marriages (and registered partnerships[1] ) are however in some cases favoured by special tax rules, just as children in some respects are treated leniently in taxation matters.

With favourable special rules for taxation of married people, marriage is recognised and given preferential treatment as a financial partnership. But there are other special rules that work in the opposite way to prevent married people using this financial partnership to reduce their tax. These rules also prevent incomes being transferred between parents and children within the family to reduce the total tax paid. It is illegal to use a spouse or children to avoid paying tax.

3.2. When a married couple lives together

Both spouses must calculate their taxable income, personal income, capital income and share income independently. The rules for married couples that follow here also apply for people living in a registered partnership.

Division of incomes and expenses between spouses

The spouse who manages or is liable for something, a security or a loan, must show the income and expenses associated with this on his or her income tax return.

For example, in the case of a house, it is the spouse who owned the house on marriage who manages it. If the house has been acquired during the marriage, for example through inheritance or as a gift, it is the recipient who manages it.

Likewise, the spouse who has bought an object for the marriage or who has taken out a loan to buy the object, is the one who manages it or the one liable for the loan.

In some cases, it is impossible to decide which of the spouses is affected by an income. In these cases, each spouse includes half of the income or expense.

Calculating tax for married couples

As mentioned before, in many cases married couples can be better off than unmarried couples living together when tax is calculated.

Tax legislation gives married couples extensive possibilities to exploit the various lower taxation limits. However, married couples must have been living together at the end of the income year to be able to make use of this.

As a spouse, you can transfer a number of basic allowances to the other spouse if you cannot use them yourself. By doing this, a basic allowance is not wasted and the total tax to be paid is less than for an unmarried couple.

At the same time, a spouse can also transfer any deficit to the other spouse. This also reduces the married couple s total tax.

Of course, being able to transfer the basic allowance and deficit is most advantageous in marriages where one spouse has a large income while the other has a small or no income.

Examples of special rules for married couples

If, for example, one spouse in the couple is not able to make full use of his or her personal allowance, the remaining part can be transferred to the other spouse when tax is calculated. This makes allowances for families where one partner is not active in the labour market and therefore has no income.

When calculating middle-bracket tax, spouses can transfer to the other spouse the part of their basic allowance of DKK 279,800 that they have not been able to use. This is advantageous for families where one spouse has a part time job.

However, it is not possible to transfer to the other spouse any part of the unused basic allowance used to calculate top-bracket tax.

When calculating tax on share income, one spouse with a large share income can take advantage of the fact that the other spouse might not have any share income. Tax on share income is 28% on income under DKK 46,700 and this amount doubles to DKK 93,400 for married couples. Only the married couple’s total share income above this amount is taxed at 4 3%. In all other cases, share income between DKK 46,700 and DKK 102,600 is taxed at 43 %. Share income over DKK 102,600 is taxed at 45 %.

If a spouse has a deficit, the other spouse can deduct the deficit from his or her income. This can be an advantage for married couples where one spouse has a limited income but large tax-deductible expenses, for example in connection with starting a business.

The same applies if a spouse has a deficit in his or her personal income. Here it is possible to deduct the deficit from the other spouse s personal income. If there is still a negative amount, it must be offset against both spouses positive capital income.

However, tax calculations do not always favour marriage.

When calculating top-bracket tax, married couples must add their total positive capital income to the income of the spouse with the highest personal income.

This means that married couples cannot exploit their freedom to move assets around in order to avoid paying top-bracket tax.

Co-working spouse

If a married couple runs a business together, the income from the business must be divided between them. The division is not dependent on who is formally registered as the owner of the business but on who is responsible for the day-to-day running of the business.

This focus on who runs the company instead of the formal ownership is due to the fact that spouses have considerable latitude in transferring assets between them. The tax rules must therefore guard against the married couple dividing the company’s income between them with the sole aim of reducing their total tax. Therefore, importance is attached to which of the spouses is actively responsible for running the company.

If the spouses do not participate in running the company equally, only one spouse is taxed on the company’s income. This will be the spouse who has put most work into running the company or who has the education or training needed to run the company. The other spouse can either be taxed as a co-working spouse or as a wage earner on a wage contract with the company.

To be eligible to be taxed as a co-working spouse in a company, the spouse must extensively participate in running the company. This requires that the other spouse works in the company at least 3-4 hours a day.

If the requirement for extensive participation is met, up to half of the company s taxable profits before capital income and capital expenses, up to a maximum of DKK 208,500 can be transferred to the co-working spouse for taxing.

Taxing a co-working spouse typically benefits smaller companies such as those in the agricultural sector.

There is also a third possibility for married couples who participate equally and extensively in running a company. If they are both responsible to an equal degree for the obligations of the company, they can choose to assess the entire company s income jointly. When the company s income has been assessed, the married couple divides the company s profit or loss between them. Then they calculate individually their share of the company s profit. The division must not be random but must be objectively based on the running of the company. This is to ensure that spouses who participate equally in running a business enterprise are not in a worse position regarding tax than they were before they married.

Gifts to spouses

Spouses can give each other gifts without having to pay gift tax or income tax on them.

When a married couple gives or sells objects or securities to each other, it does not affect tax. On the other hand, the transfer affects who is regarded as managing or being liable for the object or the security in the future. It also affects who needs to calculate income and expenses associated with the object or security on the income tax return.

If one spouse transfers something to the other spouse, he or she must not assess a profit or loss on the transfer. The spouse who has received the thing or security is viewed as if he or she had bought it at the same time as it was transferred.

In this way, married couples have a significant freedom to move their assets within their financial partnership.

When tax has to be paid

In many ways, marriage is treated as a financial partnership. Married couples can therefore transfer certain allowances and incomes to each other to reduce tax. One spouse can use a right which the other has not been able to use fully. It could be said that married couples are jointly responsible for their rights.

However, when tax has to be paid, the married couple is also jointly responsible.

If one spouse has not paid his or her tax, the other spouse will have to pay it. The tax authorities need to first have tried to get the money from the spouse who has not paid his or her tax. If the tax authorities are not able to collect the money, the other spouse is liable for the tax. This applies from the income year when the marriage took place.

This is done from a natural wish that due taxes are paid to society. If more than one person is responsible for the same tax, there is a greater chance that the tax will be paid.

3.3. Divorce and separation

In Denmark almost 16,000 couples divorce annually. Many divorces follow a separation. When a marriage breaks up due to separation or divorce, the special rules for married couples no longer apply.

Division of the estate

Often some time passes between the separation or divorce becoming official until the separated or divorced parties divide their belongings. During this time there is no change in what is considered to belong to whom. Therefore both parties continue to be taxed individually on their incomes and expenses according to the division of belongings up until that time.

When the estate has been divided, each party is taxed on the income and expenses associated with the belongings they have taken with them.

The division of the estate itself does not incur tax. Neither do the parties involved need to pay gift tax. This also applies even if one party has acquired some belongings which previously belonged to the other party. The same applies if the estate is not divided equally.

One party can take over objects from the other party. For tax purposes, the object is considered in this case to have been acquired at the same time and at the same price as it was originally acquired by the other party. This can be relevant if the object is sold on with a profit, at which time tax must be paid on the profit.

Alimony

If, because of a separation or divorce, it is necessary to pay alimony to an ex-spouse, the expense of the payment can be deducted from the taxable income. The expense can be deducted at the time it has to be paid and only if it is actually paid.

The person receiving the maintenance payment must include the amount in his or her personal income. Labour market contributions are not paid on this payment.

There can be many good reasons as to why a person might not want to make alimony payments to an ex-spouse for years after a divorce. Perhaps the person wants to break the connection. Instead of making regular alimony payments, the couple can agree that a lump sum is paid once and for all. This lump sum is not tax deductible for the person paying it. On the other hand, the recipient does not have to pay tax on the amount.

3.4. Unmarried couples living together

The special joint taxation rules for married couples do not apply for unmarried couples living together. For political reasons, many people are not interested in expanding the area of use for these special rules. They want to preserve marriage as a central institution in society.

Furthermore, an expansion of the tax rules leading to a degree of interweaving of a couple s economy would contradict the reasons for choosing to live together instead of marrying.

However, it is impossible to disregard the fact that unmarried couples living together have identical financial interests, in the same way as married couples do. It is difficult to live together without also having shared finances. In some areas, tax practices have also developed so that the conditions for unmarried couples are approaching those of married couples.

The most common tax problem experienced by unmarried couples is which party should have the allowance for interest payments on a mortgage or on something else that is used by both parties. There is no simple answer to this. Each case needs to be assessed individually. For example, it is possible to see who is named as the owner on the title deeds or who is named as the debtor on a house loan.

If one of the parties runs a business and pays the other party a wage, there is only tax allowance for the wage if it is considered commensurate with the work carried out. Because of the unmarried couple s financial partnership, it is necessary to guard against the parties randomly moving incomes around. The requirement that the wage is commensurate with the work carried out ensures that the person owning the company does not pay more in wages to the other party to avoid paying tax.

Unmarried couples who have lived together for at least two years can give each other gifts worth up to DKK 56,800 annually without having to pay gift tax. If the amount is higher, they must pay a duty of 15 % on the excess amount. This limit is regulated annually.

3.5. When an unmarried couple’s cohabitation ends

Unmarried couples living together cannot get divorced or separated. When cohabitation ends, there are no special rules to help them divide their assets. The parties must each take what they own.

If one party s assets have increased during their time together, the other party may have a right to a part of the assets or a corresponding amount of money.

For example, if the first party has paid all instalments on the house and the second party has paid for the housekeeping, the second party can have a right to a part of the assets tied up in the house. This money is tax free for the recipient. Even if the party has not paid off any debts in the house, he or she is considered to have done so - also for tax purposes.

If on the other hand, one party gives the other party a sum of money when cohabitation ends without there being any legal right to the money, the recipient must pay income tax on the amount.

3.6. Children

Children are also taxpayers. With a few exceptions, children must assess their taxable income in the same way as adults. This applies regardless of the child’s age and regardless of whether the child lives at home or elsewhere.

Taxing children s income

Often children have to do chores to get pocket money. This might be helping around the house. If the parents run a company, children might help in the company and receive pocket money or wages for this. It would be contrived if children were taxed on pocket money for their help with the harvest or similar. Therefore, children under 15 years do not have to declare wages for work in their parents company. On the other hand, parents are not entitled to deduct the expenses associated with the child s wages.

If the child is over 15 years, the wages must be taxed. Parents gain the right to deduct the wage expenses if the child has carried out work corresponding to the wages.

Children are liable to pay tax on certain benefits that are paid directly to them. Pensions and supplementary pensions paid to children following a parent s death are taxable for the child according to the legislation regulating pensions of public officials. The same applies to pensions from private pension funds and certain other benefits.

Other child benefits are paid to the parents. The child does not pay tax on these. This applies to public benefits such as dependent child allowance and child benefit (family allowance). Child maintenance payments in connection with a divorce, separation or separation of unmarried parents are also tax free if the payment does not exceed the normal payment. The normal payment amount is determined by the Minister of Social Affairs and is DKK 11,628 annually. This amount is regulated each year. The parent making the payment can deduct the total child maintenance payment from their taxable income, less DKK 1,500. Special child maintenance payments paid on birth, christening and confirmation are also tax free if they are within certain limits.

Children s savings accounts

Parents can open a child’s savings account in a financial institution. Neither the child nor the parents pay tax on the interest paid on the account in the time the money is tied up in the account. The child can also later withdraw the amount from the account without paying tax.

It is only possible to open one tax-free account for each child. A maximum of DKK 3,000 can be paid into the account annually and a total of maximum DKK 36,000.

The money must be tied up in the account for at least 7 years. The money can be paid out at the earliest when the child is 14 years and at the latest when the child is 21 years.

The desire to give preferential treatment to children’s savings is the same as the desire to give preferential treatment to pension savings. Both schemes support savings that are tied up for a number of years.

The advantages of opening a child s savings account are not as great as they used to be. Previously the amount paid into the child’s savings account was tax deductible. This is no longer the case. Furthermore, the low interest rates of recent years mean that the advantage associated with tax free interest is not as significant as before.

However, it is now possible to place the child’s savings in pools where the money is invested in securities. This can ensure a better return on the savings and possibly lead to a renewed interest in children’s savings.

Gifts from parents to children

As a rule, gift tax or income tax must be paid on all gifts. But parents (also step-parents or foster-parents) and grandparents can give their children gifts without having to pay gift tax.

The total value of the gift or gifts must not be greater than DKK 56,800 for one year. This limit is regulated each year. If the gift amount is higher, a gift tax of 15 % must be paid on the excess amount. The tax authorities must be informed of the gift.

If parents give their children a gift such as shares or bonds, parents continue to be taxed on the proceeds, such as dividends or interest from the gift, until the child turns 18.

This rule is designed to guard against tax evasion. Parents must not be able to transfer incomes to their children to reduce their own tax. However, the child is taxed on any profits from the sale of the securities which have been given as a gift.

Loans between parents and children

Loans between parents and children are treated according to the usual tax rules.

This means that the person who has borrowed the money can deduct the interest payments from their tax, while the lender is taxed on his or her interest income. If the interest on the loan is at least 4 % annually (corresponding to the minimum interest for the first half of 2008), the lender is not taxed on any capital gain on the loan. Correspondingly, the lender cannot deduct a loss due to depreciation arising from the loan. Read more about minimum interest in section 8.4.

It is typically parents who lend money to their children. Some parents choose to offer the loan interest free. This could be to help children settle down or start an education. In this case, there is, as a rule, no interest income or interest expense to tax. On the other hand, parents are taxed on any capital gains when the loan is transferred or paid off. This is a consequence of not having fixed an interest rate corresponding to at least the minimum interest.

If parents choose to offer their children an interest free demand loan, the loan is typically tax free, both regarding taxation of interest and taxation of capital gains. The fact that the loan is given on demand means that it can be terminated at any time without warning.

Calculating tax

As has been previously mentioned, children s taxable income is calculated in the same way as adults. As a rule, calculating tax for children is done in the same way as it is for adults. However, children under 18 years have less personal allowance than adults. The personal allowance for children is DKK 30,600.

Like adults, children must pay labour market contributions on wage income. This means that the 8% labour market contribution must also be paid on smaller incomes under the no tax card limit.

Children under 15 years only have to submit an income tax return if they have had a taxable income during the year.

3.7. Death in the family

Death of a spouse

If a spouse dies, the surviving spouse can decide to retain undivided possession of the estate. This means that the surviving spouse takes over everything from the deceased spouse. No duties or taxes are levied.

It can be practical for the surviving spouse to choose this option. This postpones the division of the deceased s estate, which is significant if there are other heirs in addition to the spouse. The undivided possession of the estate can last as long as the surviving spouse wants it to, or until the surviving spouse dies or remarries.

If the surviving spouse chooses to divide the estate, the estate of the deceased is independently taxable. This means that the income in the estate must be assessed from the time of the death and until the settlement of the estate so that the estate of the deceased can be taxed.

However, in most cases a tax exemption applies. If the net fortune in the estate is not larger than DKK 1,882,400, and if all the assets do not collectively exceed DKK 2,509,000 it is not necessary to pay tax on the estate of the deceased.

More than 90 % of all estates of deceased that are divided are exempt from paying tax on the estate because of this rule. The background for the exemption is that the tax income in these cases does not correspond with the administrative work needed to calculate the income. In these cases, taxes paid by the deceased are considered to be conclusive.

Spouses do not have to pay any inheritance tax, when they inherit from each other.

If parents die

Children who inherit from their parents, step-parents (or foster-parents with a special relationship) have to pay an inheritance tax on the inheritance of 15 %. However, the inheritance tax is only paid on the total assets that exceed a basic allowance. The basic allowance is DKK 255,400. The basic allowance is regulated annually.