How will getting married affect your tax?
In general, married couples and those in a civil partnership are better off tax wise, but this is not always the case. Here we have a look at what changes you need to be aware of, and those you can benefit from.
Allowances for Married Couples
The Married Couple’s Allowance is still available for a married couple, or those in a civil partnership, providing one of them was born before 6 April 1935 and that they are living together. The use of the allowance can then reduce a tax bill by between £326 and £845 a year. However, it is the husband’s income that is used to calculate the allowance for marriages before 5 December 2005, but after this date, the rules have been amended so that the calculation for more recent marriages is based on the income of the higher earner.
The “Marriage Allowance” was then introduced in April 2015 for couples born after 1935, neither of whom is a higher rate tax payer in the relevant year. This is not so much an allowance as the ability to transfer a limited amount of relief between spouses. In the current tax year the relief enables a spouse who is not using all of their personal allowance to transfer up to £1,185 of their unused allowance to the higher earning spouse, reducing the couple’s tax bill by up to £237 a year. This is a surprisingly complex relief, and you should seek advice before electing to make the transfer.
Capital Gains Tax
Capital Gains Tax can be helpful for tax planning and in most cases favours marriage, as a husband and wife each have their own annual exemption. Couples can therefore minimise their joint capital gains tax liability each year by taking full advantage of each of their annual exemptions, any lower tax bands and the offset of losses.
Gains above the exemption are taxed as the highest part of the disposing partner’s income, so a 10% tax saving can be made by ensuring that a partner who still has basic rate bands available sells the asset, rather than the partner who is liable to tax at higher rates.
Tax Free Gifts
Gifting between married partners is counted as nil gain / nil loss for Capital Gains and gifts to your spouse are also generally exempt from Inheritance tax, so transfers of assets between a married couple are therefore tax free. You are also able to leave any property or possessions to your spouse tax free after you die. The surviving spouse may be eligible for double the tax-free allowance for inheritance tax if the Nil Rate tax band was not fully used on the first death.
If one partner is in a different tax bracket to the other, using the above reliefs to move assets to the spouse with the lower income can provide worthwhile tax reductions.
Where savings are kept in the name of the lower taxpayer, or in some cases a non- taxpayer, you will pay the lower rate, or no tax on the income generated, providing the additional income earned does not put them over the taxable income threshold.
Unfortunately, assets that are held in joint names by couples will be treated as owned 50:50 for tax purposes, and the income will be taxed on that basis, unless an election has been made for a different split, which must be submitted to HMRC within strict time limits.