The number of couples that are content with just cohabitating is on the increase, with figures nearly doubling in the space of 20 years. With the raft of tax increases and allowance cuts set to add more pressure to Briton’s wallets, a financial planning expert has highlighted different allowances married couples can take advantage of.
According to data drawn from the 2021 Census, the proportion of adults who have never married or been in a civil partnership has increased every decade from 26.3 percent in 1991 to 37.9 percent in 2021, whereas the proportion of adults who are married or in a civil partnership (including separated) has fallen from 58.4 percent in 1991 to 46.9 percent in 2021.
Commenting on the statistics, Louise Higham, financial planning director at wealth manager Evelyn Partners, said: “It does seem that many younger and middle-aged couples are increasingly content with just living together.
“The total number of cohabiting couples has increased from around 1.5 million in 1996 to around 3.6 million in 2021, an increase of 144 percent. In 2021, 22 percent of couples who lived together were cohabiting rather than married or in a civil partnership.”
Ms Higham continued: “While they may not feel the need to formalise their relationship in law, such couples must recognise that they are foregoing significant tax benefits and possibly financial security by doing so.”
She stressed the urgency of such more so now than in recent years following the raft of tax allowances that are either being either slashed or frozen, as announced in Jeremy Hunt’s Autumn Statement.
Ms Higham added: “While marrying for purely financial motives is few people’s ideas of romance, couples who are ambivalent or indifferent on the subject of marriage or civil partnership could quite sensibly be swayed by the fiscal advantages. Such legal status can also provide some financial security to a partner who gives up their career to look after children.”
Optimise tax allowances
Married couples and civil partners can transfer assets such as cash and investments between them, without giving rise to any tax liabilities.
Ms Higham said: “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).”
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According to Ms Higham, it is also possible for a couple to optimise the use of their personal savings allowances so that they “minimise” tax paid on interest earned.
Ms Higham explained: “Interest rates on savings accounts have increased rapidly over the last year, and the allowances have been frozen (basic-rate taxpayers can earn up to £1,000 in interest tax-free, higher-rate taxpayers £500 and additional-rate payers get no allowance).
“With more individuals falling into the additional rate tax band, since the proposals to reduce the threshold to £125,140, this is more useful than ever for those who have built up cash savings.”
Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these are about to be halved in April.
Only £1,000 of dividends per person will be able to be received tax-free – and this will only halve again to £500 in 2024.
Couples 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, which again, will be beneficial this year with the individual CGT allowance being halved in April from £12,300 to £6,000, and then again to £3,000 in 2024.
Ms Higham continued: “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. This option is not available to unmarried couples, as the movement of assets between cohabiting couples is a disposal for capital gains purposes and would negate the benefits of this exercise.”
Inheritance tax privileges
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 percent inheritance tax.
However, Ms Higham said: “A deceased spouse or civil partner can pass an estate of any worth to the surviving spouse without immediate tax consequences.”
The IHT nil rate band that is unused by the deceased can be passed on to the surviving spouse for their use in the future – creating a potential nil rate band of £650,000 for the survivor.
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 £1million tax-free.”
Marriage also has potential additional benefits when it comes to making gifts to a spouse during their lifetime.
Where an individual makes a gift of capital or assets to another individual over the value of their £3,000 annual gift allowance 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 IHT.
However, gifts between spouses or civil partners are not Potentially Exempt Transfers and are disregarded for IHT purposes altogether. Ms Higham noted: “A married couple can also gift to others up to £6,000 per annum without the gifts being considered as a Potentially Exempt Transfer.”
The Government also allows a surviving spouse to effectively inherit the ISA savings of their deceased partner and maintain their tax-efficient ISA status.
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Ms Higham explained: “The surviving partner will receive an extra ISA allowance known as an additional permitted subscription. This is equal to the value of the deceased’s ISA holdings at the date of death and is in addition to the surviving person’s own annual ISA allowance. This is not permitted between any other individuals.”
The Marriage Allowance
Another allowance married couples can benefit from is the annual Marriage Allowance, which is available to couples where one partner is earning less than the tax-free Personal Allowance of £12,570 per annum and the higher earning partner has earnings between £12,570 and £50,270 (£43,662 in Scotland).
Ms Higham said: “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.”
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