Is marriage a good deal from a tax perspective? Un-romantic yes, but certainly a valid question. Is that little bit of paper known as a marriage certificate worth getting, even if it’s then stuck away in a drawer never to be seen until the time it’s needed ?
Danby Bloch writes in Money Marketing considers that various tax changes have now reopened the question but the short answer is “yes”, it still makes sense for most people most of the time. But there are certain new drawbacks for some to consider.
(Marriage and civil partnership are treated the same for tax purposes, so we’ve used “spouses”, “marriage” or “married” to cover both).
The transferable marriage allowance
One recent change is the transferable marriage allowance which enables you to transfer £1,150 (10%) of your 2017/18 personal allowance to your spouse. The possible tax saving being 20 per cent of £1,150: £230.
The spouse giving up a tenth of their personal allowance should be a non-taxpayer who can’t therefore use their full allowance. The recipient who can use the allowance needs to be a basic rate taxpayer with income of between £11,500 and £45,000 (normally £43,000 in Scotland).
Nil rate bands
When it comes to the capital taxes, the advantages of marriage becomes very real indeed. For example, transfers between spouses are free of inheritance tax, unless the recipient is not domiciled in the UK. That alone has led many people to get married even if they have lived together for many years in unmarried contentment.
Another IHT advantage of marriage is the inheritable nil rate band and now also the residence nil rate band.
For instance, Peter dies this year leaving his surviving unmarried partner Susan a £900,000 estate, including a £500,000 home. This will use up his nil rate band of £325,000 and his residence nil rate band for the current year of £100,000: providing a total of £425,000 free of IHT to Susan. The rest will be taxed at 40 per cent. When Susan dies, she will just have her own nil rate band to use against her taxable estate.
But if Peter and Susan were married, the estate would be tax- free on passing from husband to wife, and Susan would inherit Peter’s unused nil rate band and residence nil rate band. That would be a very valuable tax benefit for her heirs – worth at least 40 per cent of £425,000 at this year’s levels.
Capital gains tax
Capital gains tax also mostly favours marriage. Each spouse is taxed separately but there is no CGT on gifts between them – with the recipient taking over the donor’s base cost for calculating any future gain on disposal.
However, when it comes to home ownership, the tax position of married couples can be less attractive in some important respects and can provide a disincentive.
The main drawback of being married is that a couple can only have one main residence between them. So, a couple who has two homes between them pre-marriage can choose which is to be their joint main home but the other property will start building up the potential for taxable capital gains on disposal from the date of it ceasing to be a main residence. Do not forget the top rate of 28 per cent CGT can still apply to property gains.
What is more, the recent changes to stamp duty land tax have introduced further penalties for married couples buying more than one home. Two unmarried people can each buy a property without paying the extra 3 per cent property tax that now applies to purchases of second properties.
But a married couple can only acquire one property – any further acquisitions will be subject to the 3 per cent additional levy on values above £40,000.
With this in mind, anyone thinking of getting married and also buying a second property should buy the home before the wedding to avoid the extra charge.
Otherwise, the tax system is more or less neutral, with spouses taxed separately on income and other aspects of CGT. So, the main financial penalty of being married is probably now the potential cost of divorce !
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