Marc Shoffman
Fewer people are getting married but impending tax changes could make tying the knot a fiscally-responsible decision as well as a romantic one.
The number of over-16s who are married or in a civil partnership recently fell below 50% for the first time, with under-30s accounting for just 3.2% of this population, according to data from the Office for National Statistics (ONS).
Of course social views are always evolving. But, in a world where the law doesn’t necessarily keep pace, it’s important to know what financial and legal privileges you and your partner could be giving up by not tying the knot – whatever your views on marriage.
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Preparing for pension changes
Chancellor Rachel Reeves announced in her Autumn Budget that pensions will be included as part of an estate for inheritance tax (IHT) purposes from April 2027.
That could mean more estates paying inheritance tax, but one way to at least delay this is by ensuring assets are passed to your spouse or civil partner.
Married couples and civil partners can pass assets to each other including pension savings tax-free. This isn’t possible if you are just co-habiting.
Emma Sterland, chief financial planning director at Evelyn Partners, says: “Of course, the IHT problem might arise further down the line when the surviving spouse dies. While possibly benefitting from two sets of nil-rate bands, their remaining wealth could be inflated by the pension assets from the first death, potentially increasing the IHT liability for their children or other beneficiaries – especially if they die soon after their spouse.
“However, for those who are in a relationship but unmarried – whether co-habiting or not – the issue could arise on the first death, leading to potentially much greater IHT exposure than would currently be the case. It is likely that some older couples in long-term relationships will decide to tie the knot to make this problem go away, and it is a conversation that we are having with some clients.
“Anyone who is married should check their pension death benefit nomination, as after this rule change it might be best for many couples’ IHT purposes to stipulate that the pension is paid in total to your spouse when you die, rather than any portion left to children or other family members.”
Combining your ISA allowance
Another financial benefit of getting married is the ability to work together to maximise your ISA allowances.
Each year, everyone over the age of eighteen has a £20,000 ISA allowance. An ISA is a tax-efficient wrapper, which allows you to save and invest money without having to pay income and capital gains tax.
It isn’t possible to open a joint ISA account with someone else. However, if they are savvy, married couples can essentially double their ISA allowance to £40,000 by working together.
For example, if your other half hasn’t maximised their allowance (which is an annual “use it or lose it” privilege), but you have already put away £20,000, you can pay some money into their account to avoid the remaining allowance going to waste.
Of course, the option of paying money into someone else’s account is open to anyone, married or otherwise. However, unmarried couples who split up could struggle to recover these funds, meaning they are ultimately less protected.
Other tax-free allowances you can share
Once you have maximised your ISA allowance, most other savings or investments are fair game for the taxman. However, this only kicks in once you exceed a certain threshold. And, crucially, married couples can take steps to share these allowances between them.
Before delving into the efficiencies that married couples can take advantage of, we summarise the general rules below:
- Dividends: Once you exceed the £500 annual dividend allowance, you will need to pay tax on any dividend income above this threshold.
- Capital gains: Once you exceed the £3,000 capital gains allowance, you will need to pay tax on any gains you make upon selling an asset.
- Savings income: Once you start earning more than £1,000 in interest on your savings (known as the personal savings allowance), you will need to pay tax on any additional interest you earn.
If you are married and you have maximised the above allowances already, it might make sense to transfer some of your assets into your partner’s name – particularly as the dividend and capital gains allowances were cut in 2023 and were slashed again in April 2024.
This will help you reduce your overall tax bill and, as you’re married, the transfer won’t count as a gift.
It’s worth noting that gifts can be subject to a whole set of additional tax rules – particularly if given less than seven years before you die.
What is the annual marriage allowance?
Most people in the UK have a personal allowance, which means that you don’t pay any income tax until you start earning £12,570. Then, you will only be taxed on anything above this threshold. Everyone is entitled to the full personal allowance until their income hits £100,000, at which point it begins to go down.
But HMRC also rewards the institution of marriage through the tax system.
Depending on how much each partner earns, married couples are allowed to transfer some of their personal allowance between one another, if they haven’t used it all up. This is called the marriage tax allowance. This benefit is only available if the higher earner has an income between £12,570 and £50,270.
The maximum amount that can be transferred between partners is £1,260.
Income on a buy-to-let property
If you and your partner own a buy-to-let property, and you are on different income tax thresholds, then it makes sense to transfer the property into the name of the lowest earner.
That way, they can put their personal allowance (if they have any of it left) towards any income earned on the house.
Furthermore, the remaining income that you earn on the property will be subject to a lower rate of tax.
| Band | Taxable income | Tax rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
As previously, you don’t have to be married to transfer a house into someone else’s name. However, if you aren’t married and you decide to separate, your legal rights will be far less protected.
Furthermore, as a “gift” between unmarried partners, the house could be subject to a hefty inheritance tax bill if you die within seven years of passing it over.
Protecting your estate and minimising inheritance tax
Inheritance tax – it’s one of the most hated taxes of all. But it can be particularly costly for unmarried couples sharing a home.
You can pass on assets of up to £325,000 without your loved ones having to pay tax. This is called the nil-rate band. However, as soon as you exceed this limit, your assets could be subject to 40% inheritance tax.
So, if an unmarried couple share a house (and the deceased partner’s share exceeds £325,000), the remaining partner could be left to foot the bill. And, if they don’t have the cash available at the time, they could even end up having to sell the family home.
Married couples can pass their estate on to their spouse without any immediate tax implications. Furthermore, if they don’t use up their nil rate band, they can pass that on to their spouse to use in the future too.
Finally, an allowance called the residence nil-rate band gives parents some tax relief when passing their main home on to their children (or other “lineal descendants”, such as grandchildren). Each parent’s allowance is worth £175,000.
Again, married couples can combine this allowance.
When you add all of these allowances together (£325,000 + £325,000 + £175,000 + £175,000), married couples can theoretically pass on an estate worth £1 million to their children without any tax being due.
Some steps you should take if marriage isn’t for you
If marriage still isn’t for you, there are some important legal protections you can put in place instead.
For example, writing a will can help protect your partner’s interests once you are gone. This is important because, if you don’t explicitly state that you would like your estate to be left to your partner, it is possible that it will go to blood relatives instead.
Finally, putting a cohabitation agreement in place can also ensure you and your partner are treated fairly in the event of a separation or death.
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