Married couples can benefit from tax breaks that can reduce Income Tax, Capital Gains Tax and Inheritance Tax, together with other applications that can affect both personal and business finances. Although some of the rules can be complex, they are worth reviewing to see whether a married couple can benefit.
Transferring an Income Tax allowance
Before we look at the current rules, it is worth considering the historic context of the Married Couples Tax Allowance. Prior to 1990, the income of a married couple was added together for tax purposes and treated as if it was the income of the husband. The 1990 Budget introduced the concept of personal taxation, with each individual being taxed on their own income. However, married couples continued to receive a benefit in the form of the Married Couples Allowance, until it was abolished in the 2000 Budget for all married couples, except where one spouse was born before 6th April 1935. This allowance remains available to those couples who meet this criteria and in the current Tax Year can reduce the amount of tax paid by up to £941.50 a year. If the eligible couple were married before 5th December 2005, the tax reduction is received by the married man.
Not to be confused with the Married Couples Allowance, the Marriage Allowance was introduced in the 2015 Budget. This allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner, and in the current Tax Year can provide a tax reduction of up to £252 a year. To benefit, one spouse must have an income below the Personal Allowance, which is £12,570 in the current Tax Year, and can therefore transfer just over 10% of their unused Personal Allowance to their spouse. The higher earning spouse needs to be a basic rate taxpayer, that is to say, he or she receives income between £12,571 and £50,270 a year.
Going about claiming the allowance is straightforward, either via the Gov.UK website or by contacting HMRC, and you can backdate your claim to include any tax year since 5th April 2018 that you were eligible for Marriage Allowance.
Using combined allowances for Capital Gains
Capital Gains Tax (CGT) reform was one of the main features of the recent Budget Statement, delivered by Chancellor Jeremy Hunt. From next Tax Year, the annual CGT allowance will halve and then halve again in the following Tax Year, meaning that gains on asset disposals in future years are more likely to be liable to CGT.
As individuals each receive a CGT allowance, married couples can potentially reduce the amount of CGT payable on disposal, as transfers of assets between spouses are not deemed to generate an immediate tax liability. This allows part of an asset which is held in one spouse’s name to be transferred to the other spouse, so that both CGT allowances can be used.
Common applications of this rule are in the transfer of shares between spouses so that each spouse sells down part of the holding to use both CGT allowances, or the transfer of the percentage of a property prior to sale.
Transferable Nil Rate Band for IHT
Married couples also benefit from the ability to transfer any unused Nil Rate Band on death of a spouse. The Inheritance Tax (IHT) allowance for each individual is £325,000 and this allowance will remain frozen until at least 2028. However, transfer of assets between spouses on death are exempt, and any unused IHT allowance can also be transferred to the surviving spouse. If the first to die leaves all assets to their surviving spouse, their estate will benefit from a double allowance of £650,000 on the second to die.
This ability to transfer allowances also extends to the Residence Nil Rate Band, which is available on Estates where a residential property is bequeathed to a direct lineal descendent. The Residence Nil Rate Band is currently £175,000 and, as with the Nil Rate Band, if unused on the first death, the surviving spouse can receive the unused allowance, providing a further £350,000 allowance.
Contrast this to the position where a couple are not married. Any assets that exceed the Nil Rate Band (or Residence Nil Rate Band) are likely to be subject to IHT at 40%.
Keeping the ISA allowance
When a spouse or civil partner dies, the surviving spouse can inherit any Individual Savings Allowance (ISA) held at the date of death. This can be a valuable benefit if couples have made sensible financial planning decisions and used ISA allowances to hold Stocks and Shares or Cash during their lifetime. The rules provide a fresh allowance equal to the value of the ISA at date of death – or when the ISA is closed – and the new allowance is in addition to any allowance the surviving spouse has in the current Tax Year.
For couples who have built up substantial investment portfolios using the ISA allowances, the Inherited ISA rules are valuable, as the transfer of investments on death could otherwise leave the survivor in the position where future dividends or interest could be liable to tax.
The value of financial planning
Married couples can benefit from modest tax breaks under UK tax legislation, although the rules can be complex and through careful planning, there are other benefits that can be obtained by positioning assets in the most tax advantaged manner. This is where holistic financial planning can add significant value, considering all aspects of a couple’s circumstances, personal and business assets, to position these to their best advantage. Speak to one of our experienced financial planners who will take a holistic view of your finances.
If you are interested in discussing the above further, please speak to one of our experienced advisers here.
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