It sounds unromantic, but tying the knot comes with lots of financial perks.
If you’re one of the UK’s 3.5 million cohabiting couples, this might seem unfair. But the truth is the taxman loves marriage. You could save thousands of pounds in tax by getting hitched.
Read on to find out the six financial benefits of marriage.
1. You can transfer assets without paying tax
People who are married or in a civil partnership can transfer assets between themselves tax-free.
When you give away an asset, you’re usually charged Capital Gains Tax (CGT) on profits you would have made if the asset was sold. This doesn’t apply to gifts between spouses.
This is especially useful if one spouse is in a higher Income Tax bracket than the other. You could transfer a share portfolio or rental property to your lower-earning spouse. Income would be taxed at their lower tax rate, thereby reducing your overall tax bill.
2. You can double your tax allowances
Once you tie the knot, you can effectively double your tax allowances. In the 2020/21 tax year, this means:
- The £20,000 ISA allowance doubles to £40,000
- The £12,300 CGT allowance doubles to £24,600
- The £2,000 Dividend Allowance doubles to £4,000.
Using each spouse’s set of allowances can lead to significant tax savings.
If you’re a higher-rate taxpayer and you use up your ISA and dividend allowances, your dividends would be subject to Dividend Tax of 32.5%. If the profits you make when you sell your investments exceeds £12,300, you’d pay CGT at 28%.
Transferring assets to your spouse enables you to use their tax allowances. If they’re a basic-rate taxpayer, dividends above £2,000 would be taxed at the lower rate of 7.5%. Gains above £12,300 would be taxed at 10%.
3. You can boost your savings interest
Married couples can also increase their level of tax-free savings.
In the 2020/21 tax year, basic-rate taxpayers can earn up to £1,000 in savings interest without paying tax. This falls to £500 for higher-rate taxpayers and £0 for additional-rate taxpayers.
By transferring savings to the lower-earning spouse, you could reduce your savings tax bill.
4. You might protect your Personal Allowance
Your Personal Allowance enables you to earn £12,500 in income without paying tax in the 2020/21 tax year. This applies to your salary, savings interest, and income from investments.
If your income is more than £100,000, your Personal Allowance reduces by £1 for every £2 of income you receive above £100,000. The allowance is zero if your income is £125,000 or higher.
It might be possible to protect your Personal Allowance by transferring income-producing investments and savings to your spouse.
5. You could get a bigger pension
Some of your State Pension entitlements could pass to your spouse when you die. This will depend on when you die and when you reach State Pension Age.
Many workplace and personal pension schemes only pass benefits to a surviving partner if the couple were married. If you haven’t tied the knot, there’s a risk that your pension will die with you.
6. You’ll pay less tax on death
Another of the many financial benefits of marriage is a lower tax bill when you die.
Usually, Inheritance Tax (IHT) of up to 40% is charged on the value of your estate that’s above the £325,000 IHT threshold. However, any money, property or assets you leave to your spouse are automatically exempt from this tax. What’s more, if you leave everything to your spouse, their IHT threshold will double to £650,000.
The same rule applies to your main residence nil-rate band. For estates worth £2 million or less, the residence nil-rate band is £175,000 for individuals or £350,000 for couples. In total, a married couple could pass on £1 million tax-free when they die.
You can also pass on your ISA allowance to your spouse when you die. The extra allowance is equal to the value of your ISAs. So, if you have £100,000 in ISAs, your spouse will have a one-off additional allowance of £100,000. This comes on top of their usual £20,000 ISA allowance. It applies even if you leave the money to someone else in your will.
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If you’d like help planning your finances as a couple, we can help. By partnering with us, we’ll create a personalised plan that helps you achieve your goals in the most tax-effective way.
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.