It may be Valentine’s Day this weekend, but Les Cameron, Head of Technical at M&G, isn’t getting too carried away with romantic sentiment. In the following analysis, Les reminds us of the key financial planning and tax implications of marriage or civil partnership, as compared to the situations which would apply to couples who may be cohabiting.
Tax bills are on the increase. ONS statistics tell us the numbers marrying, or entering civil partnerships, is in long term decline. Is the death of romance causing unnecessary tax bills?
Of course it isn’t! You can be as romantic as you like regardless of your relationship status.
But with Valentines Day upon us many people will be popping the question. I’m sure the reasons are not tax or financial planning related (I hope…) but it is undeniable that financial planning changes when you’re planning for two.
There has been independent taxation in the UK for many years now. But there are still many areas of the tax systems where “tying the knot” can be of benefit.
I’ll be using the language of the marriage going forward e.g. spouses, widows, being married etc but the points apply equally to civil partnerships and civil partners.
Inheritance Tax (IHT)
The advantages are undeniable. Assuming your spouse is long term resident in the UK (or chooses to be) there is unlimited exemption for assets passing IHT free. Likewise any Nil Rate Band (£325,000)or Residence Nil Rate band (£175,000) not used on the first spouses death can be passed to the surviving spouse to use on death. This means a married couple can potentially pass on up to £1 million IHT‑free.
A similar process is about to be implemented with Agricultural Relief and Business Relief where a married couple can have up to £2,500,000 passed over on first death. ONS statistics tell us that while there is a decline in marriage overall, marriages at older ages are on the rise. Unsurprisingly these are predominately second marriages post a previous divorce or death. If you remarry, subsequent to being widowed, then you will probably have £1million of nil rate bands already. As your new spouse will have their own NRBs already they cannot inherit more than one. This gives an opportunity to amend wills to give away the value of these “extra” nil rate bands on first death so they are not lost. If a widow and widower remarry then there could be up to £2 million of IHT free allowance.
This will require appropriately drafted wills to suit the circumstances.
Wills and Intestacy
Intestacy is slightly different across the UK but one feature is common to all. Spouses have an automatic right to inherit whereas cohabitees do not.
They also have greater protection on death as you can’t simply disinherit your spouse. In England and Wales, you can’t stop your dependents from receiving “reasonable financial provision” after your death. A spouse or civil partner is entitled to such financial provision as is reasonable in all the circumstances whether they need it for their maintenance or not. Not married – you only get what’s needed for your maintenance. There are slight differences in the rest of the UK.
Where there is remarriage in later life there are perhaps more complicated family dynamics with children from a previous marriage etc It is crucial that wills are updated to make sure where possible your wishes are followed on death.
Marriage will revoke your will unless it is executed “in contemplation of marriage” so it is crucial to have these redrafted post marriage to ensure (where possible) your estate goes to where you want it to go. In Scotland, marriage does not revoke a will but the spouse does gather certain minimum rights so a will update may be required if you want them to get more than the minimum. There are changes afoot to stop marriages automatically revoking wills, in order to guard against “predatory marriages”, but that is not here yet.
Pension Benefits and Nominations
Spouses are more likely to be eligible for pension death benefits in income form than cohabitees. Some schemes will only pay benefits to spouses but many pension schemes make provisions for cohabitees. There may be extra criteria that need to be met before a pension income is provided to a cohabitee whereas a spouse should automatically qualify with no hoops to go through.
Lump sum benefits are usually distributed at the discretion of the pension scheme administrator. This should not be assumed to be true and each pension schemes rules should be checked to see the position. If your marriage doesn’t change your mind on who you want to benefit, tell the scheme that so they don’t need to guess.
Perhaps control beyond the grave is important. Where your spouse inherits your pension fund you cease to have a say on who inherits that pot after your spouse dies. If you want to provide for your spouse but have a say on where the benefits go when they die then a bypass trust should be established with a request your pension scheme pays to the trust on your death. This means your trustees can control benefits, as opposed to your spouse.
One final point. Come April 2027 most unused pension funds are included in the estate for IHT so if they do not go to your spouse (or a charity) on your death they will use up Nil Rate Band and potentially cause IHT charges.
Capital Gains Tax (CGT)
When you transfer an asset to an individual that is not your spouse this usually triggers a gain for CGT purposes. However, if you transfer assets to a spouse then these are treated on a no gain/no loss basis. This means the spouse is treated as if they have always owned the asset and purchased it at the original cost. The benefit of this treatment is that couples can plan disposals more efficiently by using two allowances and the available basic rate bands of one or both spouses to reduce CGT.
Many people own onshore and offshore insurance bonds. Unlike other assets that are subject to CGT, these bonds are not, so they can be gifted without creating tax charges.
Income Tax
The Marriage Allowance allows someone who is not using all their income tax personal allowance to transfer up to £1,260 of itto their spouse, or in other words saving up to £252 in tax (20% of £1,260). It is not available unless the spouse is a basic rate taxpayer.
If you are recently married and wished you knew about this allowance then no need to worry as you can apply for the 4 previous tax years, so a backdated claim could generate over £1,000 – perhaps a downpayment on a second honeymoon?
Roses are red
We have concentrated above on the key tax and financial planning aspects of getting married but there is much more to consider, what assets will we move into joint names, how much life assurance do we need, how does our cash flow planning look like with joint expenses and much more.
Getting married is a major life event. And like many major life events this should be a trigger point for individuals to review their financial planning. So once they’ve booked the ceremony, the florist and the caterer it makes sense to book an appointment with a financial planner too (I’d probably wait until after the honeymoon).
Roses are red, violets are blue, financial planning changes, where there’s not one but two.
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