Getting married can be expensive – but on the plus side, it comes with many financial advantages. Spouses or civil partners can significantly reduce their tax bills by working together as a team. Here’s how.
1. Tax on investments
If you have stocks and shares, it’s best to keep them in an ISA if you can. If you’ve used up your personal ISA allowance for the year, remember that your spouse has an allowance too. If both are used up, you have another safety buffer: you each have a capital gains tax (CGT) allowance. You can transfer assets to each other without incurring a tax bill, so you can make full use of both CGT allowances. Also remember there are lower and higher rates of CGT (check yours, as it can be quite complex). If you can ensure that the lower-rated partner makes the excess gain, then your tax bill will be lower.
If you are married or in a civil partnership, you stand to automatically inherit any pension pots in the name of your partner, and also any final salary pensions they may have. If you are merely co-habiting, you are unlikely to receive anything unless your partner has already made special arrangements for this to happen.
3. Inheritance tax
As a couple you can pass on twice the amount of assets before your beneficiaries need to pay inheritance tax (IHT). When one spouse dies, the surviving spouse will inherit their assets without needing to pay tax – but that’s not all. Every individual has an IHT allowance of £325,000, which they can pass on to the surviving partner when they die (so their spouse ends up with a tax-free allowance of £650,000). Furthermore, from 2017 everyone will have an additional £100,000 IHT allowance for their main residence (rising yearly to reach £175,000 by 2020) – so a couple dying in 2017-18 could leave assets (including the family home) worth up to £850,000 without their children having to pay any IHT.
You can now pass on an ISA’s tax-free status to your spouse when you die. You spouse inherits a special ISA allowance for that year alone, up to the value of the original ISA, so the money can stay sheltered from tax. For example, if Bob dies leaving behind an ISA worth £30,000, his widow Marion can put up to £30,000 into a new ISA in that year, in addition to using her existing ISA allowance.
Remember, everyone has a tax-free allowance of £1,000 worth of interest on all savings, so inheriting an ISA’s tax-free status may not be of much practical use when interest rates are low. However, it is still very useful for a stocks & shares ISA – and if interest rates rise, this rule could become very significant for couples.
5. Pension planning
This one’s a bit more risky, but for true soulmates it’s well worth considering. If one spouse is a higher-rate taxpayer and the other a basic-rate taxpayer, then it could make financial sense for the lower-rated partner to pay into a pension in their spouse’s name. Why? Because the tax relief would be far greater, resulting in a much larger final pension pot. It’s not for the faint-hearted, though – if you don’t stay together then things could get very tricky.
6. Marriage allowance
If your spouse or civil partner earns more than you (but is still a basic rate taxpayer) then you can transfer £1,100 of your personal allowance to them. This can reduce their tax by up to £220 in a single tax year. However, the lower earner must have an income of £11,000 or less.
Of course, none of the above should influence your decision about getting married. But if they have made you curious to find out more, then you can search for a financial adviser here.