The power of two: tax year-end planning for married couples

As 5 April draws closer, we’re now well into the thick of tax year-end planning, making the most of tax reliefs and allowances on offer before they run out.

Good planning can help you maximise investment growth and reduce the amount of tax you pay. But, if you are married, or in a civil partnership, it is not a process to go through independently.

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By joining forces and applying a team approach to your finances, you’ll find there are plenty of opportunities to manage your combined wealth more tax effectively.

1) Beat capital gains tax

Last year, the annual capital gains tax (CGT) allowance was cut from £12,300 to £6,000, and from April this year it will halve again to just £3,000 – a move that is expected to affect more than half a million of us. Some people will be faced with a CGT bill for the first time, while those that regularly pay it can expect bigger bills.

From the effective use of tax wrappers such as individual savings accounts (ISAs) and pensions, to regularly realising investment gains up to the value of the allowance, there are, at least, plenty of ways to mitigate a looming CGT bill. However, married couples as well as those in civil partnerships have another tool at their disposal – transfers between spouses are also tax free.

By transferring assets over to your spouse, it will be easier to make the most of each of your CGT allowances – effectively doubling it to £12,000 in this tax year or £6,000 from April 2024. 

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Even if you both max out your allowances, there might also be benefits of transferring assets over to your spouse if they pay a lower rate of tax than you. That’s because CGT is charged at 20% (28% for property) for higher and additional tax rate payers but only 10% (or 18% for property) for basic-rate taxpayers (so long as the gain doesn’t push them into a higher tax bracket).

If you are planning on giving assets to your spouse, it’s important to note that you aren’t just temporarily parking money with them. Once you have transferred an asset, your spouse will be its new, legal owner.

Even if you’ve been living together for years, cohabiting couples can’t transfer assets to each other to reduce their tax bill. CGT could be payable on the gift.

2) Maximise your pension contributions

There are a number of things savvy couples can do to boost their collective income in retirement.

If your partner (whether you are married or not, in this case) doesn’t pay into a pension, perhaps because they don’t work, it’s still possible for them to save tax-effectively for a retirement.

Each year, non-taxpayers can pay (or have someone else pay) up to £2,880 into a pension each year, which will be topped up to £3,600 by basic-rate tax relief (20%)

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Where one partner has used up their own annual allowance, they can also pay into their other half’s pension, so long as their partner has the allowance to spare.

Theoretically, couples could consider pooling their resources into the pension of the highest rate taxpayer to cash in on a higher level of tax relief on contributions.

But pumping more money into the highest earner’s pension purely for tax relief isn’t always a sensible move. It’s important that both people in a relationship have adequate pension savings in their own name – pensions are not joint accounts, and if you pay your money into somebody else’s pension it will legally be considered theirs.

And while pensions can be split in the event of a divorce, it’s not a straightforward process.

3) Double your ISA allowance

While you can’t open a joint ISA, married couples can effectively double their ISA allowance, enabling them to shelter up to £40,000 from tax each year. This can be as simple as paying into your spouse’s ISA once you have used up your own.

This could be particularly helpful if you might otherwise have to use general investment accounts (GIA) to hold shares and funds, which could be subject to dividend and capital gains tax over time

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In theory, there is nothing to stop unmarried couples from doing the same. However, if you paid money into a partner’s ISA and subsequently split, you could struggle to get your money back. Unmarried couples do not have nearly the same degree of protection under family law as married couples when they split.

4) Make the most of the marriage allowance – if you can

While married couples can effectively double their allowances for tax-free saving in pensions and ISAs, it’s not so easy to share the personal allowance – the amount you can earn before you need to start paying income tax.

However, some eligible couples may be able to transfer a limited portion of their personal allowance to their spouse.

The marriage allowance lets non-taxpayers hand over £1,260 of their personal allowance to their spouse or civil partner, creating a tax saving worth £252 a year.

To qualify for the marriage allowance one spouse needs to have an income below the personal allowance (currently £12,570), while the other needs to be a basic-rate taxpayer (with an income between £12,570 and £50,270 a year).

Lots of eligible couples aren’t aware of this tax break, but the good news is that if you discover you are eligible, you could make a backdated claim of up to four tax years and net a lump sum of over £1,000.

5) Cut your IHT bill

If you are married (or again, in a civil partnership) you can also transfer assets between you without worrying about an unexpected inheritance tax (IHT) bill.

Currently, married couples – who leave their family home to children – can pass on up to £1 million IHT free between them. This is based on each of them having their own £325,000 nil rate band (NRB), plus a further £175,000 for passing on a family home – known as the residential nil rate band (RNRB).

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However, wealthier couples should be aware that the RNRB is gradually tapered away for people who die with an estate worth more than £2 million. This is at a rate of £1 for every £2 that your estate exceeds £2 million, and it effectively wipes out the value of the RNRB once your estate hits the £2.35 million mark.

It is possible to get around this with careful planning. For example, you could potentially avoid paying IHT by leaving money (up to the value of NRB) to your children on the first death, rather than leaving everything to your spouse. This can be a complicated area though, and if you are dealing with an estate of this size, it will be worth getting professional advice from an estate planning specialist.