Should I get married for tax reasons?
Traditionally the emphatic answer to this question was NO. But in recent years we have seen the increase in the number of long-term relationships where there is no marriage or civil partnership, coupled with an increasing number of divorces and second relationship all backed up by changes in the law that give increasing equality to such relationships. At the same time there has been little or no change to the structure of taxation and if anything parts of the tax code have moved to favour marriage. The last factors to affect this question has been the relentless increase in property prices, particularly in the South East, coupled with the freezing of Inheritance tax allowances.
What are the factors to consider?
Before looking at tax it is worth saying that most pension schemes now recognise long term relationships and do not require marriage. Similarly, the law of succession while not giving automatic rights to cohabitees does in fact offer considerable protection to anyone who has been in a relationship for more than two years. Slightly surprisingly some of these rights are stronger after death than during lifetime, but that is not a topic for discussion in this article. Although the law of succession does recognise cohabitees, the law of intestacy (that is the law dealing with people who do not have Wills) does not. Also, it is interesting to note that subject to a couple of very minor exceptions, income tax no longer gives special treatment to married couples.
However when we start to look at the Capital Taxes the situation changes dramatically.
Capital Gains tax.
Any disposal (this covers a sale, gift, sale under value and most cases of a swap) of an asset can give rise to a taxable gain. But if you make a disposal to your spouse there is no tax instead the spouse is simply treated as having acquired the item at the date you acquired it for the same price that you are considered to have paid. While this sounds eminently fair and reasonable it offers huge scope for tax planning.
Example. Husband (John) owns a London flat that is pregnant with capital gains. John gives half the flat to his wife Patricia and the two of them then sell the flat. Instead of having one Capital Gains tax allowance of £12,300 they suddenly have two allowances offering a potential Capital Gains tax saving of £3,444. In this example it could be that the flat is let out, John is a higher rate taxpayer, but Patricia only earns about £6000 in a part time job. John gives the flat to Patricia and she receives all the rent which is then taxed as the top slice of her income. Part of the rent will be tax free, and part will probably pay basic rate tax. Not only this when the flat is sold Patricia first gives half back to John so that they can have the two capital gains tax allowances. An unmarried couple however long they have been together cannot replicate this.
All gifts to a spouse are tax free. In addition, a spouse inherits any unused Nil Rate Band. Recently we have also had the arrival of the Residence Nil Rate Band which means that in certain circumstances house owners can have an additional inheritance tax free allowance of up to £175,000 and if not used this allowance can be transferred to your spouse. The residence nil rate band can only be used to benefit your children or stepchildren (to benefit a stepchild can only be a stepchild in law, the child of a partner may to all intents and purposes be a stepchild but he or she is not a stepchild in law and therefore cannot benefit from the residence nil rate band of a cohabitee.) The effect of this combination is that an unmarried person may be limited to a Nil Rate band of £325,000 if they have no children or £500,000 (£325,000 plus Residence Nil Rate band £175,000) if they give property directly to children, whereas a couple without children have a nil rate band of £650,000 or £1m if they have children.
Example. Max and Olivia have been together for 30 years, they each have one child from previous relationships, but they are unmarried. Their house is owned jointly and worth £1m, they each have savings of about £300,000. Max dies and leave his estate to Olivia. He benefits from the Nil rate band of £325,000 and the balance of his estate pays inheritance tax of £190,000. Olivia then dies 6 years later at which stage her estate is worth £1.5m. The estate is divided equally between the two children. Olivia gets an inheritance tax allowance of £500,000 as she can benefit from the Residence Nil Rate band and the inheritance tax amounts to £400,000. If the children had both been Max’s children, then the tax would have been even greater amounting to £470,000 because Olivia would not have been able to claim the Residence Nil rate band.
Had Max and Olivia been married no tax would have been payable on Max’s death and on Olivia’s death the tax-free allowance would have been £1m so that tax payable would be £200,000. Tax saving as a result of marriage £390,000 (or £460,000 if both children had been Max’s).
It is clear from the above examples that as the law currently stands then for many people, particularly those living in the South East of England, there is a huge benefit to be obtained from being married. Occasionally with careful planning it may be possible to mitigate some of the Inheritance tax disadvantages but dodging the Capital Gains tax penalties is far more difficult.
At the end of the day, it is always important to remember that the tax tail should not wag the dog, marriage must not be entered into without careful thought and for the right reasons. However, for those in long term relationships there has to be a possibility that consideration should be given to marriage for tax reasons.
One last word of warning, in most cases MARRIAGE AUTOMATICALLY REVOKES AN EXISTING WILL. Many couples have carefully structured their Wills to work around a long-standing relationship, if they then get married those Wills are usually automatically revoked by the marriage. What this means is that it becomes essential to have a new Will made to tie in with the marriage.
For further advice on this and possible ways to protect your estate for the benefit of a partner and your children please contact the Private Wealth & Inheritance Department using the contact form below.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.
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There were no announcements in this year’s Budget about tightening up Capital Gains tax (CGT) and Inheritance tax (IHT).
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