Marriage still pays as cohabiting couples miss thousands in lucrative tax breaks | Personal Finance | Finance

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Zoe Bailey, director of financial planning at wealth manager Evelyn Partners, said nobody wants to marry purely for financial reasons. However, getting wed can put your relationship on a more solid financial footing. “Alternatively, setting up a civil partnership can give you vital rights unavailable to cohabiting couples.”

Marriage brings the following financial benefits.

First, the government offers one direct financial incentive to encourage couples to tie the knot, known as the marriage allowance.

This applies where one partner pays basic rate income tax, while the other earns less than the £12,570 personal allowance and therefore pays no tax.

The marriage allowance allows the lower earner to transfer £1,260 of their personal allowance to their spouse or civil partner, saving up to £252 this tax year.

Millions of couples can benefit, but many failed to do so. Those who have missed out can backdate their claim for up to four years, getting a handy lump sum that’s unavailable to people who live together, without marrying.

Civil partners can benefit from the marriage allowance, too.

There are indirect ways married couples and civil partners can save money, primarily by sharing their tax allowances, Bailey said. 

“They can transfer cash, investments and property between each other with triggering a tax bill, known as inter-spousal transfers.”

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This can benefit couples where one partner is in a higher tax bracket than the other. For example, if the higher earner has made a capital gain on shares held outside of a tax-free Isa wrapper, they could transfer them into their partner’s name before selling. 

That would cut their capital gains tax bill, as the lower earner pays CGT on any growth in the share values at a lower rate.

The couple could then move the money inside their Isa allowances, where they will be protected from income tax and CGT for life, a process known as Bed & Isa.

Unmarried couples cannot make tax-free transfers between each other, as HM Revenue will treat them as individuals and demand a share of any profits. So the higher earner would have to pay CGT on the share disposal.

This tax break is even more valuable as last year Chancellor Jeremy Hunt cut the annual CGT exemption from £12,300 to £6,000.

It will drop to just £3,000 from April 6, which means a greater chunk of any profit will be open to that CGT charge.

In another tax advantage, married couples and civil partners can also pass on unused Isa savings to their surviving partner on death with tax advantages intact, known as an additional permitted subscription. 

Spouses who own a buy-to-let property also have potential tax benefits. 

If the higher-rate taxpayer owns the property, they would pay 40 percent income tax on the rental income.

“However, if their spouse or civil partner is a non-taxpayer, they could take the first £12,570 free of tax via their personal allowance, and only pay basic rate tax on the surplus.”

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A married couple could move part or all of the property into the name of the lower earner via an inter-spousal transfer, with no CGT bill.

Again, there is no CGT to pay on the transfer, but unmarried couples who want to do the same could pay CGT on any gain in the property’s value.

Marriage brings IHT benefits, too. 

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Couples can pass on assets up to £325,000 tax-free to their surviving partner upon death, via the nil-rate band. 

Plus they can also pass on the £175,000 main residence allowance, which applies when passing on their home to children or grandchildren.

Cohabiting couples will only be able to use the £175,000 exemption when passing a property to their own children. If only their partner has children, it does not apply.

So married couples to pass on up to £1 million in total, but unmarried couples may only have the basic £325,000 nil-rate band.

There are also legal benefits to getting married, Bailey added. “Cohabiting partners are not automatically entitled to any of their partner’s property, financial assets or belongings if they die intestate, unless jointly owned.”

They may have the legal right to claim if they cohabited for more than two years, but this could be “protracted, stressful and expensive”, particularly if blood relatives have a strong claim, Bailey said.

Writing a will can help here, but many never get round to it.

Bailey suggested unmarried couples draw up a cohabitation agreement as protection against separation or death. “If you decide to get married in the future, this can quite easily be turned into a prenuptial agreement.”

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