While financial implications might not be at the top of your priority list when you and your partner decide to get married, there are some tax factors worth considering.
The last 10 years have seen a 700,000 increase in the number of cohabiting couples in the UK, according to the Office for National Statistics, a rise of 25.8% over the decade.
With numbers already on the rise, Covid-related wedding postponements over the last two years are likely to have increased that number. So too, has changing family structures and a rise in those wanting to live as a couple before opting to marry. But where does cohabiting leave couples legally and financially?
Keep reading to find out.
There are financial benefits to getting married
Marriage brings certain financial benefits that don’t apply to non-married couples. Exemptions, tax benefits, and the Marriage Allowance itself are among the benefits to consider.
1. Inheritance Tax (IHT) and “the myth of common-law marriage”
Back in 2019, the Guardian reported on the myth of “common-law marriage” and suggested that 24% of British people wrongly believed that a co-owned property would immediately pass to them on their partner’s death, even if they were unmarried at the time.
Another 20% thought they would inherit their partner’s estate, or automatically become executor on death if they and their partner had been cohabiting for five years.
The belief that unmarried couples have the same rights as married ones could cost cohabiting couples dear. In reality, the tax treatment for estates on death is quite different.
Married couples, and those in civil partnerships, can transfer assets on death – including any unused Inheritance Tax allowance – without any IHT to pay. This will usually happen automatically. If your partner pre-deceases you and passes on 100% of their estate, you could find your nil-rate band is doubled to £650,000.
Cohabiting couples, meanwhile, pay IHT at 40% on assets above the £325,000 nil-rate band.
2. Income Tax, Capital Gains Tax (CGT), and the spousal exemption
As with transferable assets on death, transfers made while both partners are still living can also be tax-efficient, thanks to the spousal exemption. This is beneficial because any assets transferred are exempt from CGT, with any future gains treated as the income of the recipient.
The disposal, or sale of assets, can also be made more tax-efficient by spreading the gain between partners, making use of a combined CGT exemption to lower your liability.
Income Tax savings can also be made using the spousal exemption, by transferring buy-to-let property income or investment income to a non-tax-paying partner, for example.
3. The Marriage Allowance
The Marriage Allowance is payable – in certain circumstances – to married couples and civil partners. It isn’t, however, payable to cohabiting couples.
To be eligible for the allowance, either you or your partner must have income below the Personal Allowance. This stands at £12,570 for the 2021/22 tax year and is frozen until at least 2026.
The lower-earning partner can use the Marriage Allowance to transfer some of their Personal Allowance to their spouse or civil partner. If your partner transfer £1,260 of their Personal Allowance to you, it could give you a tax saving of up to £252 a year.
For the allowance to apply you must be married or in a civil partnership, with one partner paying no Income Tax – or having income below their Personal Allowance – while the other pays Income Tax at the basic rate.
There are serious financial implications on divorce too
While there are financial benefits to marriage, the effects of divorce can be costly too.
You’ll need to re-examine your will – as you should after any big life event – to ensure it still aligns with your wishes.
You’ll also have some important decisions to make about your marital assets, including your pensions.
There are three main ways that pensions can be split following a divorce: a pension sharing order, an offsetting order, and an earmarking order. The right option will be different in each case and there’ll be important decisions to make the moment a divorce is decided upon, so be sure to speak to us.
At Hartsfield, we can help you to navigate the intricacies of divorce and find the right solution for you.
Get in touch
If you would like to discuss the IHT benefits of holding onto your pension or any other aspect of your long-term financial plans, including the potential impact of divorce, please get in touch and find out how our team of expert planners can help.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.