Valentine’s Day: Marry for love but don’t ignore the financial benefits

Valentine's Day is just around the corner and it is, by no doubt, still a very popular time of year to pop the most important question: “Will you marry me?” Without taking the romance out of marriage proposals completely, it should be noted that marriage and civil partnerships can also come with financial benefits compared to cohabitation.

Louise Higham, financial planning director at Tilney, considers these below.

The Marriage Allowance – up to £252 tax saving

“The annual Marriage Allowance is available to couples where one partner is earning less than £12,570 income per annum and the higher earning partner has earnings between 12,570 and £50,270 (£43,662 in Scotland). The Marriage Allowance enables those eligible to transfer £1,260 of the lower earner’s annual tax-free Personal Allowance to their spouse or civil partner, creating a tax saving of up to £252 a year – more than enough to cover a Valentine’s Day candlelit dinner for two in future years.

“While that’s a perk for lower earning couples it won’t benefit couples who 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 tax planning opportunities to maximise the use of two sets of tax allowances. For example, by making sure you both use your annual Individual Savings Accounts (ISA) allowance (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) will help to reduce your overall tax liability as a couple.

"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, as an individual selling an asset for a profit – such as shares or a second property – you can realise up to £12,300 in gains this tax year before a capital gains tax (CGT) charge becomes due. CGT 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. It has been strongly considered that the Chancellor could raise CGT to help repay the growing national debt so 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. It is important to note that the IHT bill will have to be settled before probate is granted and the surviving partner may not have the assets outside of the home to pay this tax liability.

"Therefore, for example, if a partner is left a share of their jointly owned 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. Where there are children, the couple may benefit from the Residence Nil Rate Band (RNRB) of £175,000, which can mean that together with the £325,000 nil rate band an individual can pass assets up to £500,000 tax-free upon their death.

“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) can also be passed between married spouses to enable them to 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.

"This means that a married couple could potentially pass on an estate of up to £1m tax-free.

“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, over the value of their £3,000 annual gift allowance, 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. This means that a married could gift up to £6,000 per annum without the gifts being considered as a Potentially Exempt Transfer.

“So, while romance and love will be at the forefront of the minds of most couples over dinner this Valentine’s Day, you should also be aware that are also strong tax perks to getting married. All you need is love – but the tax perks are without doubt a bonus.”