Is there ever a better time to play cupid than with Valentines Day just around the corner?
With the average cost of a wedding in the region of £20,000 – £25,000, it is hard to believe there might be a financial incentive to saying “I do” to your significant other.
This briefing note considers 4 notable tax advantages to walking down the aisle.
Inheritance Tax (“IHT”)
Provided both partners are domiciled in the UK for IHT purposes, IHT is not payable on any gifts made between married couples or civil partners during their lifetime or on their death (“the Spouse Exemption”). The Spouse Exemption means married couples or civil partners can pass all of their assets to their partner safe in the knowledge their loved one will not receive a hefty IHT bill on their death.
IHT is calculated at 40% of the value of the deceased’s estate exceeding the Nil Rate Band. The amount of IHT payable can be somewhat substantial for unmarried couples, especially when the surviving partner is not able to take advantage of the Spouse Exemption for want of a marriage certificate!
Individuals currently benefit from a Nil Rate Band of £325,000. This means the first £325,000 of their estate is taxed at 0% for IHT purposes. Married couples or civil partners inherit their spouses unused Nil Rate Band on the second death.
For example, if a husband dies in 2016 leaving his entire estate to his wife, his Nil Rate Band of £325,000 will remain fully intact as his assets pass to his wife free of IHT due to the Spouse Exemption. When his wife subsequently dies, she will have the benefit of her own Nil Rate Band and she will inherit the benefit of her husband’s Nil Rate Band. On the assumption that the wife’s Nil Rate Band remains at £325,000, the first £650,000 of her estate will be taxed at 0%.
It is also worth noting that individuals who die on or after 6 April 2017 will be able to benefit from an additional Residence Nil Rate Band if they leave their family home to their direct descendants. In the same way as the Nil Rate Band, the benefit of any unused Residence Nil Rate Band can be inherited by the surviving spouse or civil partner.
Reducing Income Tax Bills
Although we are all taxed as individuals for the purpose of income tax, where one partner of the marriage or civil partnership pays a lower rate of income tax than the other, there is potential to reduce the overall family tax bill by transferring income generating assets (for example, savings, investments and rental properties) to the lower rate paying partner. This means income from the assets transferred to the lower rate paying partner will be taxed at the lower rate or not at all in the case of non-earning or lower earing partners where the income does not exceed the personal tax free allowance of £10,600 per year (2015/16).
Anti avoidance legislation is in force preventing individuals from deriving benefit from an asset that has been given away. For example, if property generating rental income is transferred to an unmarried partner to avoid paying tax on the income, then the unmarried partner transferring the property cannot spend, invest or benefit in anyway from the rental income. However, it is recognised that HMRC does not apply this anti avoidance rule to married couples. Furthermore, transferring assets to an unmarried partner triggers CGT liability and may be a Potentially Exempt Transfer, for the purpose of calculating IHT, if assets are transferred 7 years prior to the unmarried partner’s death.
Notably, transferring assets to an unmarried partner leaves the transferring partner exposed to the risk that, on separation, the non-married partner is the legal owner of the asset, and can therefore walk away from the relationship with the transferred asset.
There is a similar risk for married couples or civil partners, however such transferred assets are generally deemed to be owned by both parties and form part of a divorce settlement to be negotiated on separation.
Pay Less Capital Gains Tax (“CGT”)
If, when an individual sells assets the overall gain (after deducting any losses and applying any reliefs) exceeds the annual exempt amount of £11,100 for the tax year (2015/2016), CGT will be payable.
Married couples or civil partners can transfer assets between themselves without triggering CGT liability as transfers between married couples or civil partners are deemed to take place at nil gain/nil loss. This, combined with taking full advantage of both partners annual exempt amount, means that married couples or civil partners can transfer assets between themselves so they can effectively realise gains of £22,200 (2015/16) before any CGT is payable.
From February 2014, married couples or civil partners from low income households can apply online for Marriage Allowance. This permits a spouse, who does not pay income tax, to transfer £1,060 of their personal tax-free allowance to their partner per year. This increases the value of their partner’s personal allowance for income tax purposes.
However, in circumstances where one partner is a higher rate tax payer, earning £42,386 or more per year, the couple is automatically excluded from applying for Marriage Allowance.
This briefing was posted on 25 January 2016.