The Marriage Allowance
The Marriage Allowance can enable eligible married couples and civil partners to save up to £252 of tax per tax year. And despite the marriage tax allowance being introduced almost seven years ago, many eligible couples are still missing out on this tax break.
The Marriage Allowance is designed to benefit couples where one spouse has insufficient income to make full use of their tax-free personal allowance (£12,570 for 2023/24). Where the couple meets the qualifying conditions, the spouse with the unused personal allowance can elect to transfer £1,260 of the allowance to their partner, offering a tax saving of up to £252 for 2023/24 on their tax bill.
It is also currently possible to backdate the claim to 6 April 2019, to obtain an additional tax saving of up to £990. Please note that the deadline for claiming the marriage allowance for 2019/20 is 6 April 2024 so time is running out to claim it.
The transfer can only be made if the spouse who receives the transferred allowance is a basic rate taxpayer, meaning that for 2023/24 they would normally need to have an income of no more than £50,270 (or £43,662 if you are in Scotland).
If you are married or in a civil partnership, then anything you leave to your partner is generally free of inheritance tax (IHT). Whereas bequests to others (and lifetime gifts made within seven years of death) attract IHT if the value of your estate exceeds the nil rate band (NRB) which is currently set at £325,000.
If your spouse or civil partner passes away you can also inherit their unused NRB (known as the transferable nil rate band), potentially allowing you to pass on up to £650,000 of assets to the next generation without incurring IHT.
In addition, the residence nil rate band (RNRB) was introduced in April 2017 and is currently £175,000 per person. Like with the NRB, if the conditions are satisfied it should be possible for any unused RNRB to be transferred to the deceased’s spouse or civil partner’s estate.
Pay less Capital Gains Tax
If an individual sells an asset (such as property or shares), they will pay capital gains tax (CGT) on any gain in excess of the annual exemption, which is currently set at £6,000 (2023/24). However, as both spouses have their own CGT exemption, with careful planning assets can be transferred so that effectively a married couple’s allowance can realise gains of £12,000 before CGT is payable. Please be aware that the annual exemption is set to fall to £3,000 in April 2024.
Usually, when an asset is transferred from one owner to another this can potentially trigger a CGT liability; however, this does not apply when switching ownership between spouses.
By transferring assets between spouses, it can be possible to make use of a spouse’s lower tax rate or unused annual exemption. It is important that tax advice is sought prior to any asset transfer or sale as there are pitfalls to avoid and there may be reporting requirements. To be effective for tax, the transfer to your spouse or partner must be a genuine outright gift.
Reduce Income Tax
If one spouse or partner pays tax at a lower rate of tax than the other, assets can be switched so they have taxable income but are owned by the lower-earning spouse. Similarly, having your spouse as a shareholder or director in a limited company can help with tax planning – allowing you to maximise your available allowances and potentially pay income tax at lower rates.
There are of course risks in giving assets away to unmarried partner – if you later split, they will legally own these assets and can walk away with them. In addition, there is anti-avoidance legislation that states that if you give assets away you can’t derive any benefit from them, but this does not apply to married couples.
For married couples and civil partners who hold a final salary scheme, the surviving spouse will typically receive survivor benefits based on the final salary pension that has been built up by their partner, however, this does not necessarily apply to couples living together. Each scheme sets its own rules and the wording of the particular scheme needs to be looked at. Some schemes stipulate that it can only be paid to someone who is financially dependent, whereas others will allow you to nominate a partner.
With regards to money purchase schemes, these are much more flexible but do require you to complete an expression of wishes form to ensure that the nominated beneficiary receives the benefits in the event of death. Ultimately, the decision about where the benefits are paid rests with the Pension Trustees.
If you would like further information on any of these areas outlined above, please do not hesitate to contact us.
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