Whilst I do not wish to take the romance out of this decision, there are some invaluable tax benefits available to married couples which they may wish to take into consideration. For couples who are effectively living together as married couples in all but name, it would be a shame to potentially miss out on some of the tax benefits and unknowingly cause additional stress and financial hardship upon your partner following your death. The below tax benefits apply equally to marriages and civil partnerships.
- Inheritance Tax. This is one of the most valuable reliefs, allowing assets to be transferred to spouses during lifetime or upon death with no Inheritance Tax consequences. Unmarried couples do not benefit from this relief, which can result in accelerated tax liabilities as well as surviving partners being forced to sell assets to fund Inheritance Tax costs.
- Dealing with probate. In certain cases, the personal representatives of an estate are not required to submit an Inheritance Tax Account to HM Revenue & Customs. As the submission of an Inheritance Tax Account delays the probate application being able to be submitted, the avoidance of having to submit an Account can speed up obtaining the grant significantly. Leaving assets to your surviving spouse increases the chances of not having to submit an Inheritance Tax Account (subject to other conditions being met).
- Capital Gains Tax. Married couples are able to transfer assets between each other with no immediate Capital Gains Tax consequences. For unmarried couples, the transfer is treated as taking place at the market value of the asset with potential Capital Gains Tax consequences.
- Income Tax. With the Capital Gains Tax benefit mentioned above, it can be possible to restructure the ownership of assets between spouses in order to enjoy the benefit of both spouses’ tax free allowances and lower rate tax bands for income purposes.
- Marriage allowance. In some circumstances, it is possible for one spouse to elect to transfer 10% of their personal allowance to the other spouse, allowing them to benefit as a couple. This allowance is not available to unmarried couples.
- ISAs. Following the death of a spouse, it is possible for the value of their ISAs to transfer to the surviving spouse, whilst retaining the tax free ISA wrapper. For unmarried couples, the surviving spouse is restricted to their usual limits (currently £20,000 per tax year) for investing the inherited funds into an ISA, which could take several years.
- Defined benefit pensions. It is common for defined benefit pensions to provide reduced benefits to surviving spouses upon death of the pension holder, whereas there may not be any benefits provided to the survivor of an unmarried couple. As the terms of all pension funds differ, you would need to consider the terms and conditions of your own pension on this point.
The next step
For any further advice relating to this article please contact Nick Edwards, or your usual UHY adviser.
