Five tax advantages of being married
We spoke to three tax and financial planning experts – Gary Smith of Tilney, Matt Brown of Thomas Miller Investment and Tony Mudd of St. James’s Place – to find out what the current rules and regulations are surrounding tax benefits of married couples both in life and after death.
Mudd says that while in principle we are all taxed as individuals, married couples are given a bit of leeway in arranging their finances to reduce the overall family tax bill.
Here are five benefits of marriage:
The Marriage Allowance was introduced in April 2015. It lets an individual who earns less than the personal allowance transfer 10% of the allowance to their partner (must be a basic rate taxpayer earning between £11,501 and £45,000). This boosts the receiving partner’s personal allowance, meaning they can earn more before they start to pay tax.
For the current 2017/18 tax year, an individual earning less than the £11,500 personal allowance can transfer 10% (£1,150) to their husband, wife or civil partner, resulting in a £230 tax break for the recipient.
But claims can be backdated to the 2015/16 tax year. See YourMoney.com’s Marriage Allowance guide for more information.
Defined Benefit (DB) pensions
Some DB pension schemes still discriminate against unmarried couples by only paying death benefit in the form of a pension to a widower or dependant up to the age of 23. In other cases of death of a pension member, the scheme will only pay-out 50% of the originally quoted income to the deceased person’s spouse.
The term ‘spouse’ is usually strictly adhered to and unless the couple were married at the point of death, the surviving partner may not receive anything, even if the deceased had a will. This is because technically, the pension member does not own the pension rights – the pension trustees do – and ultimately, how much is paid out and to whom is down to their discretion.
With a defined contribution (DC) pension scheme, the fund will typically be paid to a dependant at the discretion of the pension provider. However, Tilney recommends that an “expression of wish form” is completed to ensure that death benefits are paid to the member’s intended beneficiary.
Capital Gains Tax
Ordinarily, an individual selling an asset for a profit can realise up to £11,300 in gains in a tax year before a tax charge is due.
Before the sale, married couples and civil partners can transfer investments between one another with no tax liability in order to take advantage of their combined Capital Gains Tax allowance of £22,600. Or they can transfer in full to the partner who’s expected to incur the lesser charge.
Either way, by splitting the assets first, such as in the disposal of a buy-to-let property, this can be a really useful tax mitigation technique potentially minimising tax due on dividends, interest and rental income. This isn’t available for unmarried couples.
The tax benefits of marriage aren’t solely confined to a couple’s lifetime. One of the greatest benefits is married couples and civil partners can inherit their partner’s estate without paying inheritance tax.
Assets above £325,000 passed between cohabiting but unmarried couples on death may be subject to a 40% inheritance tax charge, but a deceased spouse or civil partner can pass an estate of any worth to the surviving spouse without any immediate tax consequences.
The widower can also inherit their spouse’s unused nil rate band (the value of a person’s estate not subject to IHT – currently £325,000 per individual) creating a potential nil rate band of £650,000 for the survivor.
Further, the main residence nil-rate band (RNRB) introduced in April this year allows a family home to be passed on to direct descendants free of IHT – currently it gives an additional allowance of £100,000 per person, effectively taking the threshold at which IHT becomes payable to £850,000 for family beneficiaries. See YourMoney.com’s Five little known points about the property and death tax change for more information.
ISAs after death
While ISAs can’t be transferred between spouses during their lifetime, they can be transferred on death to the surviving spouse while retaining their tax-free status.
The survivor can receive an increased allowance equal to the value of their late husband’s, wife’s or civil partner’s ISA value which they could ‘top up’ with the value passed to them on death. As an example, at the time of death (must be on or after 3 December 2014), if your spouse had saved £20,000 in their ISA, in addition to your individual limit of £20,000 for the 2017/18 tax year, you’d also get a separate one-off £20,000 ISA allowance for that tax year – even if they leave the actual money to someone else. See YourMoney.com’s Death and ISAs: rules to change in April for more information.
Plan to protect your legacies
If marriage or civil partnerships remains off the cards, adequate planning should be carried out to protect legacies and provide for the surviving partner in the event of death.
Smith says: “If there’s no will in place at the point of death, the rules of intestacy do not provide for partners in any way whatsoever. It is therefore an absolute necessity that an up-to-date will is put in place.”
He adds that a marriage or civil partnership shouldn’t be entered into lightly, but there may be an extra incentive to marriage based on the tax benefits to couples.
Mudd adds that its important to note that if you write a will and then get married, it has the effect of revoking the previous will. “You can however write a Will in contemplation of marriage that will not be revoked once the parties do actually marry,” he says. See YourMoney.com’s I’m married, do I still need a will? for more information.
Stamp duty tax disadvantage
While the tax advantages of being married are clear, Kelly Greig, a partner at Irwin Mitchell Private Wealth’s tax, trusts and estates team warns that last week’s Budget announcement on the stamp duty cut for first-time buyers won’t be available if one of the married/civil partners owns a property.
She says: “If one of you owns another property you can also be liable for the extra 3% stamp duty surcharge, as spouses are treated together. This ties in with capital gains tax where you can only have one main residence for exemption.”
Related: see YourMoney.com’s guide on how cohabiting couples can protect themselves financially if you’re not looking to get married.