It’s likely that anyone proposing marriage to the person of their dreams is going to get far with the words “let’s get married, it’s tax-efficient!”.
While it’s unlikely to get a rapturous “yes!” it would be a good point. Marriage does bring several financial benefits thanks to a level of flexibility that the taxman allows, enabling couples to arrange their joint assets in an extremely tax-efficient way.
From Income Tax to allowances on savings, Inheritance Tax to Capital Gains Tax, being married provides legitimate amounts of leeway to ensure your finances are as efficient as possible.
But some of the allowances and benefits available are not known or used by married couples, so read on to discover five financial benefits of marriage you need to know about.
1. Potentially reduce the amount of Income Tax you pay
As a married couple, the taxman allows you to transfer allowances to maximise tax-efficiency, allowing you to reduce the tax you pay on savings, investments and rental property.
One way you could do this is to put income from a buy-to-let into a spouse’s name if they earn significantly less than you, which could prevent you from going into the next, higher, tax bracket.
Alternatively, you could put savings into your spouse’s name, as they could enjoy tax breaks on the savings income they receive.
This would mean transferring ownership of the asset, so could have potential implications in the event of the marriage breaking down. You should seek professional advice.
Speaking with a financial planner ensures the transfers minimise tax.
2. You might be able to increase the amount you earn before paying tax
If you or your spouse is a basic-rate taxpayer, and the other doesn’t earn enough to pay Income Tax, you can benefit from the Marriage Allowance.
For the 2021/22 tax year, this allows the non-taxpayer to transfer 10% of their £12,570 Personal Allowance to the basic-rate taxpayer, providing them with a £1,250 uplift on their allowance. This means they can earn £13,820 in the tax year before paying basic-rate tax.
This allows the basic-rate taxpayer to keep £250 of their salary, and best of all, it only takes moments to apply on the government website. The non-taxpayer will need to complete the application, and HMRC adjusts the taxpayer’s code, which means it rolls over into the next tax year.
3. Marriage could significantly reduce the Inheritance Tax your loved ones may pay
While Inheritance Tax is one of the most unpopular taxes, marriage can help ease the pain. Every person in Britain can leave loved ones up to £325,000 Inheritance Tax free when they die.
Alongside this, and subject to certain rules, you may also add the residence nil-rate band (NRB), which provides an additional £175,000 to the £325,000 you already have, totalling £500,000 that you can leave IHT free.
As a married couple you have two major IHT advantages:
- The first to die can pass all of their estate to the spouse without the risk of Inheritance Tax needing to be paid, no matter how much the estate is worth.
- When the second spouse dies, they can add the first deceased’s NRB (and residence nil-rate band if applicable) to their own, doubling the band. This means up to £1 million may be left to loved ones without any Inheritance Tax being due.
By doubling the nil-rate band through marriage, a family could potentially avoid an IHT demand, which could dramatically increase the amount they receive from your estate.
4. Typically, you can inherit your spouse’s ISA
While ISAs are not liable to Income Tax or Capital Gains Tax, they are liable to Inheritance Tax – unless you are married.
Under the Additional Permitted Subscription rules, a spouse can effectively inherit the ISA and its tax benefits as it allows the survivor to increase their ISA allowance by the amount in the deceased’s ISA.
The rule can be used for cash or investment ISAs, meaning you or your spouse can keep the combined value of your ISAs within a tax-efficient wrapper, instead of losing their proportion on their death.
5. You could dramatically reduce Capital Gains Tax liabilities
This is particularly important for married couples with investments or who have more than one property.
Capital Gains Tax is typically paid on gains made on many personal assets over the value of £6,000, as well as property that is not your main home. Because of this, CGT liabilities can be substantial.
The tax does have an allowance, meaning you can make a gain of £12,300 before CGT is liable. However, once the allowance is breached, CGT will be charged at between 10% and 28%, depending on your earnings and what you have made the gain on.
If the gain is likely to take you above the £12,300 allowance, you could transfer some of the assets to your spouse to sell, meaning they can also utilise the allowance before being taxed. In other words, a married couple could legitimately pool ownership to double their allowance to £24,600 before being liable to CGT.
However, taxation and using allowances correctly is complicated, so speaking with a financial planner who can guide you through the process is essential. As well as ensuring you can maximise every tax break, it can also ensure you are not breaching any tax rule that may incur penalties.
Get in touch
If you would like to speak with us or find out more about how you can use your allowances more effectively as a married couple, email firstname.lastname@example.org or call us on 01785 876222.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate tax advice.