Unmarried couples living together, whether they plan to marry or not, face a starkly different tax landscape compared to those who are wed, experts caution.
The Office for National Statistics has reported that marriage rates bounced back to pre-pandemic figures in 2022, alongside recording “highest levels of cohabitation prior to an opposite-sex marriage” with nine in ten couples sharing a home before getting married, and the numbers are even higher for same-sex couples.
This trend suggests a significant number of people might be unaware of the tax consequences of cohabiting without a marriage certificate. Ben Glassman, Financial Planning Partner at Evelyn Partners, one of the UK’s top wealth management firms, pointed out that cohabiting partners often have “often fewer rights and benefits conferred than they might think”.
Moreover, Glassman highlighted that by marrying or entering into civil partnerships, couples could benefit significantly from understanding and utilising the tax perks available to them.
Moving assets
When it comes to asset management, being in a legally recognised union like marriage or a civil partnership can be financially advantageous. It allows for the transfer of assets such as money, investments, and property between partners without incurring tax due to inter-spousal transfer rules, reports the Express.
Additionally, married couples or civil partners can combine their tax allowances, effectively doubling the benefits. Despite being together for long periods, cohabiting couples lack the benefit and tax planning opportunities that married couples or civil partners enjoy, and hence could face liabilities for capital gains and inheritance taxes.
Ben stated: “If a higher-rate taxpayer owns a buy-to-let property, they would pay income tax of 40% on the rental income. If their husband, wife or civil partner is a non-taxpayer, it could make sense for them to transfer the property, as their partner can use their basic personal allowance of £12,570. If the rental income is less than this allowance, it will be free from income tax, and if more than, then only basic rate tax will be paid.”
Savings
The combined ISA allowances of married couples and civil partners amount to a full £40,000, with no inheritance or capital gains tax implications, allowing them to effectively utilise their personal savings allowances to reduce the amount of tax paid on interest earned.
At present, basic-rate taxpayers can earn £1,000 in interest not subject to tax, higher-rate taxpayers can earn £500, and additional-rate taxpayers have no such allowance.
As Ben further noted: “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 have been halved so that only £1,000 of dividends per person can be received tax-free. That halves again to just £500 from 6th April for the new tax year.”
Marriage Allowance
Ben highlighted: “Finally, the annual Marriage Allowance 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).”
“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.”
Inheritance tax
For unmarried couples, the maximum amount that can be passed on tax-free using the nil rate band is £325,000, or £500,000 with the residence nil rate band if they leave their main home to their children or grandchildren.
On the flip side, married couples have the perk of being able to pass on everything to their spouse completely tax-free. When the second partner passes away, they can potentially combine any unused allowance from their late spouse to double up to £1million tax-free, steering clear of the hefty 40% inheritance tax.
Unmarried partners living together also face potential legal hurdles if one passes away, as without joint ownership or having lived together for over two years, there’s no automatic legal right to inherit. Ben’s advice for cohabiting couples is to make a will, considering only 26% have done so, to ensure their wishes are respected regarding their estate after they’re gone.
Couples have the option to create a cohabitation agreement when they’re taking the big step to live together, or if they’ve been sharing a home for ages. Ben recommends: “This can help to make sure that you are treated fairly in the event of separation or death. If you decide to get married in the future, the cohabitation agreement can quite easily be turned into a prenuptial agreement.”
