Be sure to marry for love…and the tax breaks12 February 2019
Saint Valentine’s Day is on the horizon, when couples show their love for each other through cards, presents and perhaps a nice dinner. It is therefore unsurprising that this day is notoriously popular for popping the question.
While love and commitment are the overriding considerations when tying the knot, there are a few other perks to consider, as Ian Dyall, head of estate planning at Tilney, examines below.
“Changing social trends mean fewer people are choosing to get married these days, with the most recent data from the Office of National Statistics indicating that marriages between men and women had fallen to an all-time low in England and Wales. There will undoubtedly be a combination of factors behind this trend, but one is that according to the British Social Attitudes Survey a significant proportion of people (46%) believe cohabiting couples have the same rights as those who are legally married.
“This is a widespread misconception. There are a number of concessions which allow married couples and civil partners to move money, and in some cases tax allowances, between each other to make best use of their allowances. This means that tying the knot has a number of financial advantages.
“In 2015, the Government introduced a ‘marriage allowance’ whereby a low earning (currently below £11,850 p.a.) spouse can transfer up to £1,190 of their personal allowance to their other half. The higher earning spouse must only be earning between £11,851 and £46,350 p.a. but by utilising this allowance, could save up to £238 in tax this year. If you were married during the 2015/16 tax-year, you can potentially backdate a claim to 6th April 2015, reducing the tax liability by up to £900. This is not permitted for couples who have yet to get married.
“Married couples and civil partners have the potential to achieve further tax benefits when it comes to managing or selling assets. This is because transfers of cash or assets, such as shares, between married couples of civil partners, known as ‘inter-spousal transfers’ do not constitute a disposal for tax purposes. Used efficiently, it can mean couples transfer cash or investments to whichever partner is exposed to lower rates of tax. Such transfers are easy to effect and rarely involve any cost and can be used to maximise the use of individual allowances, such as the personal savings allowance on cash interest payments, the annual dividend allowance and the capital gains allowance where assets are disposed of.
“Ordinarily an individual selling an asset for a profit can realise up to £11,700 in gains this tax year before incurring a capital gains tax liability. Before the sale however, a married person could transfer some of their assets to a spouse or civil partner – with no liability to tax – in order to utilise the extent of their combined Capital Gains Tax allowance (2 x £11,700) or indeed they could transfer the assets in full to the spouse/civil partner to incur the lowest Capital Gains Tax charge. Either way, by splitting assets first, the couple could potentially save thousands in tax. This option is not available to unmarried couples.
“The tax benefits of marriage are not solely confined to the couple’s lifetimes. In fact, perhaps the biggest financial gain comes in the event of death. Whereas assets valued above £325,000 passed between cohabiting couples on death may be subject to Inheritance Tax of 40% on the excess, a deceased spouse / civil partner can pass an estate of any worth to the surviving spouse without immediate tax consequences. Indeed, this important difference in treatment has been highlight recently by the case of comedian Ken Dodd who married his partner of 40-years, two days before his death last year, resulting in an £11 million tax saving. Of course, no one knows when they will die, so it is advisable not leave such matters until you are on your deathbed. Co-habiting couples and friends sharing a house would be liable to inheritance tax on assets above their nil rate band on their death, which may cause significant problems for the surviving cohabiter, as they may need to sell the property to pay the tax.
“Furthermore, any unused Inheritance Tax nil rate band by the deceased can be passed to their beloved spouse for their use in the future; creating a potential nil rate band of £650,000 for the survivor. This has improved further from 6th April 2017 when the Residence Nil Rate Band (RNRB) was introduced and a couple (i.e. individuals who are married or in a registered civil partnership) is now able to potentially claim a further £250,000, resulting in £900,000 combined. Furthermore, the RNRB will increase in £25,000 increments (per individual) during each of the proceeding two tax-years, until it reaches £175,000 by April 2020. This will ultimately provide each individual with potentially £500,000, or £1m for a married couple, in assets that can be passed to beneficiaries free of inheritance tax. The RNRB however is only available when the family home is passed to children or grand-children on deaths after 5th April 2017, and the allowance is restricted or eliminated if the deceased’s estate is worth over £2m.
“Extending this point, if an individual makes a gift of capital / assets to another individual during their lifetime it may be classed as a Potentially Exempt Transfer and, should death occur within seven years from the date of the gift, the beneficiary may be liable to Inheritance Tax. However, gifts between spouses / civil partners are not Potentially Exempt Transfers – they are ignored for Inheritance Tax purposes altogether.
“Understanding too that only very rarely are income and savings split equally between spouses / civil partners throughout lifetimes, the Government now allows a surviving spouse to effectively inherit the ISA savings of their deceased partner and maintain their tax-efficient ISA status. Provided death occurred on or after 3rd December 2014, the surviving partner will receive an extra ISA allowance known as an additional permitted subscription (APS). This is equal to the value of the deceased's ISA holdings at the date of death and is in addition to the surviving person's own annual ISA allowance. Indeed, this is not permitted between any other individuals.
“One aspect which is often overlooked is the dependant’s pension within occupational pension schemes. On death of a pension member, the scheme will often provide a ‘spouse’s pension’ typically equating to around 50% of the originally quoted income for the deceased. The term of ‘spouse’ however, is often strictly adhered to, and unless the couple in question were married at the point of death, the surviving partner may not receive anything, potentially resulting in thousands of pounds of income being lost. It is imperative therefore that the term ‘spouse’s pension’ is clearly understood before death. However, a recent test case has awarded the spouse’s pension to an unmarried partner of a deceased member of an occupational pension scheme, so the requirement to marry might therefore no longer be so important for this benefit.
“One thing is for certain, if marriage / a civil partnership remains off the cards, adequate planning needs to be carried out to protect legacies and provide for the surviving partner in the event of death. For example, if there is 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.
“The flip side to all of this, of course, is the divorce rate which now affects 1 in 2 couples. Divorce is one of those rarely planned events in life that can have serious financial implications. While the process of arriving at a financial settlement will be led by lawyers operating through the Courts, taking advice from a financial adviser can help ensure that the way assets are divided is arrived at as tax efficiently as possible and that appropriate plans are put in place for what is often a major change in a person’s financial circumstances. .
“Ultimately, a marriage or civil partnership should not be entered into lightly, but if the notion is already on the horizon, maybe there’s also a financial incentive to pop the question this Valentine’s Day?”
Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.
We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.
Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.