Eleri Jones - Marriage and Tax

Many of us will have filed personal tax returns during this past week or so. It may not sound the most romantic, as we are approaching Valentine’s Day, but for those couples who are not married, it may have got them thinking that it could be worth considering tying the knot.

Love comes first obviously! But there are also some considerations when it comes to finances and taxes. It may be thought of by some to be old fashioned, but marriage can make things simpler when it comes to some areas of finance.

If you’re not set on getting married, it is perhaps then more important to be clear on your intentions when it comes to areas such as inheritance to avoid costs for your partner or family.

The most obvious one to talk about is Inheritance Tax (IHT). With a married couple, if one spouse dies and leaves everything to the other, the remaining living spouse receives the entire estate free of IHT.

Without being married, the remaining unmarried partner must pay tax at a sum equivalent to 40% on the value of the estate over £325,000 (they may benefit from other reliefs depending on their assets and beneficiaries).

When it comes to Capital Gains Tax (CGT), married couples can transfer assets between themselves without any CGT implications. Whoever owns the asset is liable for the CGT payment.

If one party is a higher rate taxpayer and the other is a basic rate taxpayer, and the parties wish to dispose of an asset, it may be in their interests for the basic rate taxpayer to dispose of the asset so as to attract the lower rate of tax.

If one party is employed and is a higher rate taxpayer and the other does not work, and both parties receive rental income, it may be in their interests for the rental income to be received by the non-employed party so as to make use of their Personal Allowance (£12,570 can be received as income free of income tax) instead of the income being taxed at 40% which would be the case for the employed higher rate taxpayer.

Looking at Income Tax, there is a marriage allowance that married couples can apply for that lets them transfer £1,260 of your Personal allowance to your spouse.

To benefit as a couple, the lower earner must normally have an income below the Personal Allowance (£12,570). The other spouse must pay income tax at the basic rate (meaning their income is between £12,571 and £50,270) before they receive the Marriage Allowance.

The person who earns the least should make the claim if both receive employed income. If either receive dividends or savings income, they will need to work out who should make the claim by calling the Income Tax Helpline. The marriage allowance can reduce their tax by up to £252 in a tax year.

It could result in one party paying more tax, but overall they could pay less as a couple.

A claim can be backdated to include any tax year since 5th April 2019 that they were eligible.

Once received, the Personal Allowance will transfer automatically to the spouse every year until they cancel the Marriage Allowance (that should happen if the income changes or the relationship ends).

They are relatively easy to apply for as couples can apply online for free via the gov.uk website and if successful, new tax codes will be provided to reflect the transferred allowance.

As with every area of personal finance and tax, I always advise speaking to an expert to clarify your personal situation to ensure you get the right advice.