For love…and money

With Valentine's Day around the corner, it will no doubt be a somewhat different affair this year with florists, jewellers and restaurants unable to provide their usual romantic fare. However, one thing is unlikely to change and that is the fact that it remains a very popular time of year to pop the most important question: “will you marry me?”

Love and commitment are undeniably the two overriding motivations for marriage proposals. However, couples contemplating tying the knot should also be aware that marriage and civil partnerships can also come with financial benefits compared to cohabitation. Zoe Bailey, financial planning director at Tilney, lays these out below.

The Marriage Allowance – up to £250 tax saving

“Some couples are able to benefit from the annual Marriage Allowance. This is available to couples where one partner is earning less than £12,500 income per annum and the higher earning partner has earnings between this and £50,000 (£43,430 in Scotland). The Marriage Allowance enables those eligible to transfer £1,250 of the lower earner’s annual tax-free Personal Allowance to their spouse or civil partner, creating a tax saving of up to £250 a year – more than enough to cover a Valentine’s Day candlelit dinner for two in future years.

“While that’s a perk that won’t benefit couples where there are higher rate tax-payers, there are other tax benefits to being married for affluent couples as well, namely when it comes to selling assets and maximising other tax allowances.

Optimising tax allowances through Inter-spousal transfers

“Married couples and civil partners can transfer assets such as cash and investments between them, without giving rise to any tax liabilities. This creates numerous options to maximise the use of two sets of tax allowances. For example, by using through two sets of annual Individual Savings Accounts (worth up to £40,000 for a couple) and reducing tax on bank and building society savings account interest through optimising use of the personal savings allowance (basic rate taxpayers can earn up to £1,000 in interest tax-free, for higher rate tax payers the limit is just £500 and for additional rate tax payers there is no allowance). Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances (up to £2,000 of dividends per person can be received tax-free) and they can also reduce or eliminate entirely potential tax on profits crystallised on the sale of assets through using two sets of annual capital gains tax exemptions. The key here is that married couples (and civil partners) can transfer assets between themselves – known as “inter-spousal transfers” – without triggering a tax liability.

“For example, an individual selling an asset for a profit – such as shares or a second property - can realise up to £12,300 in gains this tax year before a capital gains tax (CGT) charge becomes due. GCT is currently 20% for those subject to the higher and additional tax rates on most assets, but 28% on residential property (other than their main residence). However, married couples have the flexibility to transfer assets between themselves ahead of a disposal in order to utilise their combined Capital Gains Tax allowance (2 x £12,300) or indeed they could transfer all of the assets to whichever of them is expected to incur the lowest Capital Gains Tax charge. Either way, by splitting assets first, the couple could potentially save thousands in tax. This option is not available to unmarried couples, as movement of assets between co-habiting couples is a disposal for capital gains purposes and would negate the benefits of this exercise. With speculation rife that the Chancellor could raise CGT in his Budget next month, the ability to use two sets of exemptions could become even more valuable.”

‘Til Death Do Us Part

“The tax benefits of marriage are not solely confined to the couple’s lifetimes. In fact, perhaps the biggest financial benefit comes in the inevitable of event of death. Unmarried couples can pass on assets valued up to £325,000 tax-free upon death (the inheritance tax nil rate band), but anything above this is potentially subject to 40% inheritance tax. Therefore, for example, if a partner is left a house that far exceeds this value, they could end up having to sell it to pay the tax, putting a loved one in a very difficult financial position at a time of emotional loss.

“However, a deceased spouse / civil partner can pass an estate of any worth to the surviving spouse without immediate tax consequences. Furthermore, any unused Inheritance Tax nil rate band by the deceased can be passed to his / her beloved spouse for their use in the future; creating a potential nil rate band of £650,000 for the survivor. Furthermore, the Residence Nil Rate Band (RNRB) means that a married spouse can potentially claim a further IHT exemption on the value of the family home, enabling married couples to pass on greater amounts of assets tax efficiently where there are children.

“Marriage also has potential benefits when it comes to making gifts to your loved one during your lifetime. Where an individual makes a gift of capital / assets to another individual during their lifetime - perhaps a car or high value piece of jewellery - it may be classed as a Potentially Exempt Transfer and, should death occur within seven years from the date of the gift, the beneficiary may be liable to Inheritance Tax, a nasty surprise if they don't have the resources to pay the tax. However, gifts between spouses / civil partners are not Potentially Exempt Transfers – they are ignored for Inheritance Tax purposes altogether.

“So, while financial matters will not be front of mind for most couples over dinner this Valentine’s Day, there are also strong tax perks to getting married. All you need is love - but the tax perks are without doubt a bonus.”