What’s the Point of Marriage?
Latest figures from the Office of National Statistics indicate that the marriage rate has been on a downward trajectory since the early 1970’s, hitting its lowest level on record in 2015.
For many young couples there is a significant quandary between buying a house together and getting married. The cost of the average UK wedding is now an eye watering £27,161, according to the Skipton Building Society. So does it make sense to sacrifice all your savings for a wedding in order to prosper from the financial perks of marriage later down the line?
Over a 50 year marriage, a couple could be as much as £190,964 better off, even taking the potentially extraordinary cost of wedding into account (although unfortunately most of the benefit is a saving in inheritance tax).
It’s a common misconception that couples who are living together have the same rights as married couples. In fact, cohabiting couples have very little rights. Should the couple decide to separate there is no legal entitlement to shared assets either. At the risk of sounding unromantic, the best tax strategy you can have is to get married.
Unlike couples who are simply living together, married or civil partnership couples can share their assets between them to make the most of both of their tax free allowances, and ultimately avoid a hefty tax penalty. This is significant benefit.
Each individual currently has an annual Capital Gains Tax (CGT) allowance of £11,700. Where an individual might incur capital gains of more than this, they can transfer some of the assets to their spouse and effectively benefit from double the allowance (so a married couple holding the assets jointly could make a gain of £23,400 before paying any tax).
If this is still going to leave you with a CGT bill, it is prudent to split the assets in such a way that you use both allowances and the lowest rate taxpayer foots the bill for the additional capital gains to minimise the amount of tax due. Married couples can also transfer assets to make the most of the annual dividend allowance and personal savings allowance.
Married couples can also enjoy £238 tax saving this financial year by using the marriage allowance. If one spouse has less than £11,850 in taxable income during the tax year, they can transfer £1,190 of their personal tax-free allowance to their other half – provided the higher earning spouse is a basic rate taxpayer earning up to £46,350 (£43,430 in Scotland) a year.
Unfortunately most of the benefits of marriage occur at the most difficult times. As morbid as it seems, this is biggest upside to being married from a tax perspective. This is the reason why many long term cohabiting couples marry in older age, or if one partner is terminally ill. Assets passing between married couples on death are generally exempt from inheritance tax. This can amount to a saving of 40% which can potentially save the surviving spouse hundreds of thousands of pounds.
Every individual has an inheritance tax threshold which is currently set at £325,000 while homeowners have a property threshold, which will be £175,00 by 2021. When married partners leave assets to one another, their tax free bands are added together so that the surviving spouse has a threshold of £650,00 and (assuming they are passing it to children or grandchildren) £350,000 worth of property free of tax.
However there are also advantages arising on death. Assets that have made significant gains, if passed to a spouse on death, are generally given a new base value for tax purposes at the date of your death, all the while still avoiding inheritance tax.
In 2015 a rule change meant that ISAs inherited from a spouse or a civil partner were now free from tax liabilities. Previously the tax efficient status of those products ceased on owners death. The surviving spouse can now apply for an additional ISA allowance, known as an Additional Permitted Subscription allowance, which is equal to whatever their partner held in the ISA at the time of their death.
Although increasingly rare, there are still millions of people with generous defined benefit pensions which often include, surprisingly, a spouses pension if their partner passes away. The average rate a spouse can get is around half of their partners pension, payable for the rest of the spouses life, so potentially a huge benefit. If you’re not married the pension trustees may still pay the pension, however it is completely at their discretion. Generally married couples find it easier to inherit their partners pension on death, regardless of what kind of scheme it is. It is important to read the small print however, as policies vary enormously.
While cohabiting couples can draw up agreements and wills to help determine how assets are split or inherited, there’s very little they can do to avoid paying taxes altogether. Of course there is the argument that the government needs to keep up with the times and give cohabiting couples some of the tax benefits their married peers enjoy; regrettably it’s unlikely to change for the foreseeable future. Cont