All’s fair in love and…tax

The Office for National Statistics has today published data on the UK divorce figures for 2014, and this confirmed that the number of couples divorcing is continuing to decline. Indeed, although over 111,000 couples sought a dissolution to their marriage during 2014, this was actually 3.1% lower than the rate in 2013 and 27% lower than the peak number of divorces during 2003.

While most people tie the knot for love, some couples are seeing it as a simple tax planning solution, and this could be one of the factors affecting the declining rate in divorce. Gary Smith, financial planner at Tilney, looks at just some of the tax planning options that are available to married couples.

What’s yours is mine…

In the eyes of the government, only those who are married or in a civil partnership are viewed as one part of a whole for tax purposes, with the ability to share their allowances.

In 2015, the Government introduced a ‘marriage allowance’ whereby a low earning (below £11,000 p.a.) spouse can transfer £1,100 of their personal allowance to their other half. The higher earning spouse must only be earning between £11,001 and £43,000 p.a. but by utilising this allowance, could save up to £220 in tax this year. This ability to transfer allowances would be lost on divorce.

Married couples and civil partners have a further tax benefit when it comes to selling assets. Ordinarily an individual selling an asset for a profit can realise up to £11,100 in gains in the tax year before a tax charge becomes due. Before the sale however, assets can be transferred freely between spouses/ civil partners – with no liability to tax – in order to utilise the extent of their combined Capital Gains Tax allowance (2 x £11,100) or indeed they can be transferred in full to the spouse/civil partner who is expected to incur the lowest Capital Gains Tax charge. Either way, by splitting assets first, the couple could potentially save thousands of pounds in tax. This option is not available to unmarried couples, as movement of assets between couples is a disposal for capital gains purposes and would negate the benefits of this exercise.

‘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 gain comes in the event of death. Whereas assets valued above £325,000 passed between cohabiting couples on death may be subject to Inheritance Tax of 40% on the excess, 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 for their use in the future; creating a potential nil rate band of £650,000 for the survivor. This will increase further from April 2017 when the new ‘residence nil rate band’ will be introduced, resulting in an additional combined £200,000 allowance for married couples.

Extending this point, if an individual gifts capital / assets to another individual during their lifetime 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. Alternatively, however, gifts amongst spouses / civil partners are not Potentially Exempt Transfers and ignored for Inheritance Tax purposes.

Understanding too that only very rarely are income and savings split equally between spouses / civil partners throughout lifetimes, the Government now allows a surviving spouse to effectively inherit the ISA savings of their deceased partner and maintain their tax-efficient ISA status. Provided death occurred after 3rd December 2014, although the ISA status ends on death, the survivor is afforded an increased allowance equal to the value of their late spouse’s / civil partner’s ISA value which they could ‘top up’ with the value passed to them on death. Indeed, this is not permitted between any other individuals.

One aspect which is often overlooked is the dependant’s pension within occupational pension schemes. On death of a pension member, the scheme will often provide a ‘spouse’s pension’ typically equating to around 50% of the originally quoted income for the deceased. The term of ‘spouse’ however, is often strictly adhered to, and unless the couple in question were married at point of death, the surviving partner may not receive anything, potentially resulting in thousands of pounds in income being lost. It is imperative therefore that the exact terminology of the spouse’s pension is determined before death.

Ultimately, a divorce often results from non-financial reasons, but couples should consider the potential tax consequences, or at least certainly be aware of them, prior to making their final decision.

To discuss this or any other financial planning topic please contact Gary Smith on 0191 269 9971/ gary.smith@tilney.co.uk

-ENDS-

Important information:

The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. This press release does not constitute personal advice. Past performance is not a guide to future performance.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.