Saying 'I do' for a tax allowance - the tax advantages of being married

There is no escaping that today is valentine's day and I am sure there will be proposals today.  There are still huge tax advantages for couples to be married rather than cohabiting. A marriage certificate is an inheritance tax saving. 

It is a common misconception that cohabiting couples will inherit everything. So many clients believe their partner is their common law spouse and entitled to their estate. Sadly that is not the case. Under the intestacy rules (the rules that govern estate administration when you have no Will in place) a cohabitate will not receive your estate, no matter how long you have been together. If you have a Will leaving your estate to your partner then the Will ensures they inherit your estate but your partner will not benefit from the tax reliefs a married spouse does. 

Whether couples wish to provide absolutely for each other, or leave assets in a trust to give the survivor income, they will benefit from the Spouse exemption, resulting in there being no inheritance tax (IHT) to pay.  Where an estate is left to the surviving spouse, then no matter the value of the estate, it is exempt for inheritance tax. For unmarried couples any assets, including their share of the property, above the nil rate band, (currently £325,000) will attract inheritance tax at 40%. 

For married couples, subject to any lifetime gifts or legacies under their Will, their IHT nil rate band will not have been used and this can be transferred to the estate of the surviving Spouse reducing the tax payable on their death. It is this allowance, known as the transferable Nil Rate Band, that provides the £650,000 allowance that many clients are aware of.

In addition, if you own a property that you have lived in and are leaving your estate to your direct descendants you have an additional allowance, known as the Residence Nil Rate Band, which is currently £175,000.  Again, this is transferable between spouses.  So if the Residence Nil Rate Band has not been used on the first death, it is transferable to the survivor's estate, providing (currently) a combined Residence Nil Rate Band allowance of £350,000.  It is worth noting that the Residence Nil Rate Band allowance tapers if your estate as at the date of your death is over £2million and the allowance is capped at the value of the equity in your property if the equity is less than the allowance. Through marriage, children from any previous relationships are automatically included within the definition of direct descendants in claiming the Residence Nil Rate Band but children of unmarried partners are not. 

Any assets transferred between Spouses during their lifetime are not subject to the ‘seven year rule’, as those gifts are exempt for inheritance tax. Lifetime transfers between Spouses are also exempt from capital gains tax. 

If one Spouse is a basic rate tax payer and the other pays higher rate tax then a Declaration of Trust can be created over any income that is received jointly, to vary the ownership of that income to make use of the income tax allowances and the basic income tax rate. 

Any ISAs owned by the first to die at their death can be transferred to the surviving Spouse. Their ISA allowance is not lost on their death, as it would be if the ISAs passed to a partner and not to a Spouse.

So though it is unromantic, the tax allowances available may be the incentive you need to book the Registry Office. 

It’s important, however, to remember that marriage brings significant rights and responsibilities. Divorcing spouses can make far more extensive financial claims against the other than those who just live together.  In fact, unmarried couples who live together have very limited claims under current laws.  Anyone planning to marry should go in with their eyes open and taking advice from a specialist family lawyer is important.  Entering into a pre or post nuptial agreement can mitigate against some risk on divorce. The key here is receiving holistic and specifically tailored advice and balancing up the benefits and risks of decisions made.

How We Can Help 

If you would like to review your own tax position and/or discuss making a will then please do contact one of our experts today.