Married couples can benefit by £190k
As the Supreme Court considers the rights of non-married couples, Sam Brodbeck looks at the financial perks of saying ‘I do’
Modern weddings might cost a fortune but tying the knot can save a couple hundreds of thousands of pounds over a lifetime. This month’s royal wedding aside, marriage in Britain appears to be in terminal decline. Despite same-sex couples appearing in official data for the first time, after gay marriage was legalised in 2014, the number of new marriages each year is falling steadily. In 2015, the most recent year with available data, 245,500 couples married, an annual drop of 3pc.
Couples who decide against marriage not only forgo extra tax allowances but they risk losing out on state benefits. Last week, the Supreme Court heard a potentially landmark case concerning the rights of unmarried couples.
Siobhan Mclaughlin, 46, is fighting the Government after being denied bereavement payments when her long-term partner died, leaving her and four children. If the couple had been married, the family would have been entitled to £2,000 plus a weekly widowed allowance of up to £118 a week.
Jo Edwards, a partner at law firm Forsters, said unmarried couples were “sleepwalking into difficulties”, oblivious of their lack of rights “until it is too late”. She said: “It is hoped that different treatment of unmarried couples on death – lack of intestacy rights [when a person dies without leaving a will] and inheritance tax treatment – will also be addressed in the longer term, to reflect relationships in modern society.”
Elsewhere, a private members’ bill led by Conservative MP Tim Loughton, which aims to extend civil partnerships to heterosexual couples, is winding its way through parliament. If turned into law, this would allow couples the same rights as married people without entering the institution.
Cohabiting couples are the fastest growing household group in Britain yet, under current rules, certain tax perks are open only to married couples and civil partners.
Sarah Coles, of pension provider Hargreaves Lansdown, estimated that a typical couple married for 50 years could benefit by as much as £190,000, even accounting for the £27,000 average cost of a wedding.
She said: “The calculations only work if you stay married. Once you introduce a divorce and a remarriage into the proceedings you’re looking at a significant financial loss.”
Mrs Coles’ calculations assume a couple has £230,000 of investments between them, with dividends of 3pc a year, and £20,000 of savings earning 2pc interest. One is a higher-rate (40pc) taxpayer and the other a basic (20pc) taxpayer. Allowances rise by inflation for the next 50 years.
The marriage allowance
This tax break is chronically underused. It is thought only half of the four million couples eligible for the allowance claim it, collectively missing out on as much as £1.3bn.
To qualify, one of the pair must not earn enough to pay income tax (less than £11,850 in 2018-19) and the other must pay basic-rate tax, earning between £11,850 and £46,350. In Scotland you cannot earn more than £43,430.
The lower-earning individual can pass £1,190 of their personal tax-free allowance to their partner. This cuts your tax bill by £238 a year. You can claim as far back as April 2015 when it was introduced. If you qualified in each year, you would be eligible for £900 now.
Split your assets
Married couples can also take advantage of lower tax rates paid by a basic or non-taxpayer by transferring assets to a lower-earning spouse. Income-generating assets, such as company shares or savings accounts held outside of Isas, can be transferred to the lower-earners’ name.
In April, the dividend allowance was cut from £5,000 to £2,000. Dividends above that amount are taxed at 7.5pc for a basic-rate payer, 32.5pc at the higher rate and 38.1pc for the top rate.
Basic-rate payers also have a higher “personal savings allowance”, meaning they can earn £1,000 a year in interest from assets such as bonds, bank accounts and NS&I without paying tax. Higher-rate payers get £500 while the additional rate has no allowance.
‘Couples who aren’t married are sleepwalking into problems’
Moving assets to the lower-earning spouse could save thousands in tax.
Investments outside of Isas and rental properties attract capital gains tax. Jointly owning these assets allows couples to use both sets of capital gains allowances, £23,400 combined in 2018-19. Unmarried couples would face a tax charge if they tried to change ownership of an asset.
Couples can also contribute to each others’ Isas and pensions, which benefit from added tax relief.
Tax-free inheritance
Increasingly, married couples and civil partners are treated as a single person when it comes to death duties (IHT).
For several years, surviving spouses have been able to make an extra Isa contribution equal to the value of the Isa assets left by their partner when they die. As of April, the rules are even more generous. Previously, any investment returns or interest earned between the death and the administration of their estate being completed could be subject to IHT.
Colossal tax savings can be made. Everyone can pass on £325,000 free of IHT, which is charged at 40pc on assets above that threshold (there is an extra £125,000 allowance where a family home is involved). Surviving spouses inherit their partner’s allowance on their death, meaning a couple can pass on £900,000 in 2018-19 free of tax. By April 2020, this will rise to £1m.
Unmarried couples do not inherit an IHT allowance. They are not protected if their partner dies without leaving a will – a spouse would automatically receive all the deceased’s assets – and may also lose out with pensions. Final salary style pensions, for instance, almost always include a “spouse’s benefit”, which continues to pay half or two thirds of income to a widowed partner.