Last Updated on July 15, 2024 by Nasir Hanif
Marriage comes with its set of emotional and practical benefits, but did you know it can also positively affect your finances through tax savings? In the UK, the tax system offers several advantages to married couples and civil partners, from allowances to inheritance benefits. Working with an inheritance tax adviser can help optimise these benefits further. Here are four ways that marriage can reduce your tax bill, making your financial life a bit easier and possibly enhancing your ability to save for the future.
Table of Contents
1. Marriage Allowance: Sharing Personal Allowances
One of the simplest ways to see immediate tax benefits from marriage is through the Marriage Allowance. This allows a lower-earning spouse or civil partner who earns less than the standard Personal Allowance (£12,570 for the tax year 2021/22) to transfer up to £1,260 of their unused allowance to their higher-earning partner. This transfer can reduce the higher earner’s tax by up to £252 per year.
The Marriage Allowance can be particularly beneficial if one partner either does not work or earns significantly less than the other. To qualify, the higher earner must have an income that does not exceed the basic rate tax threshold, which is £50,270 for most of the UK but £43,662 in Scotland.
Eligibility and Application
The lower earner must have an income below £12,570.
The higher earner’s income must be between £12,571 and £50,270 (£43,662 in Scotland).
Both partners must be born on or after 6 April 1935.
Applications for the Marriage Allowance can be made online through the HMRC website and once approved, the change is typically backdated to the beginning of the tax year.
2. Capital Gains Tax: Transferring Assets
Marriage can also bring savings in Capital Gains Tax (CGT). Each individual in the UK has an annual tax-free allowance for capital gains (£12,300 for 2021/22). In a marriage, you can transfer assets between each other without triggering CGT, allowing you to effectively double your annual exempt amount to £24,600. This is particularly useful when planning to sell assets that have appreciated significantly in value, such as property or shares.
Strategic Use of CGT Allowance
Transfer ownership of assets to equalise each partner’s taxable gains.
Make use of both partner’s annual exempt amount before disposing of an asset.
An inheritance tax adviser can provide guidance on how to structure these transfers to maximise tax efficiency, especially if you are planning substantial asset sales.
3. Inheritance Tax: Spousal Exemptions
Inheritance Tax (IHT) is another area where marriage offers significant tax advantages. Married couples and civil partners can pass their estates to each other free of IHT, regardless of the size of the estate. The standard IHT rate is 40% on estates over the threshold of £325,000, which means the potential savings can be substantial.
Additionally, any unused portion of the IHT threshold can be transferred to the surviving spouse, effectively doubling the IHT threshold for married couples to £650,000. This transferable allowance ensures that a significant portion of the family wealth can be passed on to future generations without a hefty tax bill.
Planning with an Inheritance Tax Adviser
Discuss estate planning to utilise both IHT thresholds fully.
Consider additional reliefs and exemptions, such as the Residence Nil Rate Band.
An inheritance tax adviser can help in making intricate decisions regarding estate planning, ensuring that both partners fully utilise their allowances and reliefs.
4. Income Tax: Higher Rate Threshold Planning
For couples where one partner earns significantly more than the other, being married can help in optimizing the use of tax bands, especially around the higher rate threshold. By spreading income more evenly through dividends or a salary from a family business, couples can ensure that both partners’ tax-free personal allowances and lower tax bands are fully utilized, reducing the overall tax liability.
Effective Income Splitting
Use dividends or a family business to allocate income efficiently.
Both partners use up their personal allowances and basic rate bands.
This method requires careful planning and adherence to legal guidelines, so consulting with a tax professional is advisable to ensure compliance and optimal structuring.
Conclusion
Marriage not only signifies a lifelong partnership but also brings several financial benefits under UK tax law. From sharing personal allowances to strategic inheritance tax planning, these perks can lead to significant savings. Consulting with an inheritance tax adviser can further enhance these benefits, ensuring you and your partner make the most of your finances. Remember, the key to maximising these benefits lies in understanding how to apply them effectively to your specific circumstances.
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