You may have noticed that last Friday was Valentine’s Day. The name “Valentine’s Day” is thought to come from a Roman priest in the third century AD who performed secret marriages.
Marriage can evoke a range of beliefs: some people genuinely value the institution, others are indifferent, and some do not believe in it at all. So, what makes marriage so popular? Is it love and romance, or are marriage’s legal protections and tax benefits so alluring?
Many couples nowadays choose to cohabitate because they do not believe a religious or civil ceremony is necessary to demonstrate their commitment to each other. In that case, where does that leave you as a couple if you are not married or in a civil partnership?
We are not lawyers and cannot provide legal guidance, but we can certainly discuss tax matters. There are specific tax advantages associated with marriage. Generally speaking, civil partnerships and marriages are treated the same in terms of taxation.
So, let’s look at these advantages:
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Marriage Tax Allowance
As a married person, you may be entitled to a tax allowance of £1,260, resulting in a reduction of £252 in your tax bill. The name of this allowance is misleading because you are still entitled to it even if you are in a civil partnership.
Marriage tax allowance is when one partner who is a basic rate taxpayer can accept unused personal tax allowance from the other partner.
This typically occurs when an individual has a personal tax allowance of £12,570 but cannot use it due to low or no income.
In this situation, they can transfer 10% of the allowance to their partner. When you claim this allowance, you will be entitled to it each year unless, of course, your circumstances change.
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Passing assets to each other tax-free
When you are married or in a civil partnership, you can pass assets to each other without incurring any capital gains tax (CGT) or future inheritance tax (IHT).
Normally if you transfer assets like shares, investments or property to your spouse, there are no tax implications.
This used to be very popular in the bygone days when the annual exemptions for CGT was much higher. Individual partners would transfer shares or other assets between them to save tax before selling anything to a third party.
Nowadays the tax saving is a maximum of £720 if you are a higher rate taxpayer and only £540 if you are a basic rate taxpayer. This is because the tax-free allowance is now reduced to £3,000.
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No Inheritance tax when you pass assets to each other on death
Inheritance tax (IHT) is one tax which has the most advantages when it comes to marriage. Managing IHT is becoming a concern for many of you.
When you are married or in a registered civil partnership, it becomes a little simpler. Whatever you leave to your partner is tax-free.
Of course, this provides a cushion of comfort which stops many of you from doing any IHT planning. Remember the exemptions are £325K per person and if you own your home, you get another £175K, so a total of £500K is exempt for tax purposes.
As a couple you get a £1 million tax exemption against all your assets and from 2027 this includes your pension pot.
So, if you think you will exceed this limit on the second death, the time to plan is now. Speak to your manager here at Myers Clark or visit us at www.myersclark.co.uk
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Application of intestacy rules
Talking of IHT, the part that is important for those of you who are not married or in a civil partnership is your Will.
If you are not married but share a home with your partner, it’s important to know that if you pass away without a will, your partner may have limited rights to your assets.
Depending on how the home is owned they might even lose the property. Therefore, having a Will is essential. Make sure you don’t skip this part.
You should not skip this part, even if you are married or in a civil partnership. The laws of intestacy offer some protection, but probably not what you expect.
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You can transfer the unused allowance for saving
If you are a higher-rate (40%) taxpayer, you are entitled to £500 of tax-free income from savings, such as bank interest. Similarly, if you are a basic-rate (20%) taxpayer, you can earn up to £1,000 of tax-free interest income.
Individuals in a marriage or civil partnership have the opportunity to split their savings so to take advantage of this situation. This option is not available if you are cohabiting because the transfer of cash could trigger future IHT.
As your relationship grows, it’s important to think about legal protection and tax benefits. While this might not be your first concern at the start, marriage can offer tax advantages.
If you want to understand more and trust us with your tax affairs, here’s how we can help you with your taxes.