What are the tax benefits of saying ‘I do’?

• Marriage and civil partnerships offer major tax advantages, including tax-free transfers, doubled tax-free allowances, and access to lower tax bands. 
• interactive investor’s calculations reveal how spouses can save big on capital gains, dividend, and inheritance taxes.

With Valentine’s Day around the corner, Myron Jobson, interactive investor’s Senior Personal Finance Analyst, explores the tax advantages available to married couples and civil partners.

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Myron Jobson says: “While love and commitment are the cornerstones of marriage and civil partnerships, there’s also a compelling financial argument for tying the knot – particularly when it comes to tax. 

"The Marriage Allowance, for example, allows lower-earning spouses to transfer a portion of their personal allowance to their partner, potentially reducing the household tax bill by hundreds of pounds each year. Then there’s the inheritance tax benefit – married couples and civil partners can pass on assets tax-free, a key advantage that unmarried couples don’t automatically enjoy. This benefit has become even more compelling in light of the proposed changes to the treatment of farms, businesses, and pension for inheritance tax purposes.

“Pensions and capital gains tax rules also tend to favour those who are legally married. Of course, tax perks shouldn’t be the sole reason to get married, but for those already in committed relationships, the financial benefits are certainly worth considering.”

Marriage Allowance

This allowance enables one partner to transfer up to £1,260 of their Personal Allowance to the other, provided the lower earner makes less than £12,570 a year and the higher earner is in the basic-rate tax band. This is worth up to £252 a year, or £2,520 over ten years.

The Marriage Allowance is particularly beneficial for retired couples because many retirees have unequal pension incomes, meaning one partner may earn below the Personal Allowance.

Currently, you can backdate your claim to include any tax year since 5 April 2020 in which you were eligible for the Marriage Allowance.

Capital Gains tax (CGT)

Tax-free transfers between spouses

Assets can be transferred between spouses without triggering CGT. This means they can transfer shares, property, or other chargeable assets between each other at no gain, no loss. This allows couples to strategically manage tax liability by shifting ownership before selling an asset.

Making use of both CGT allowances

Each individual has a CGT annual tax-free allowance of £3,000. By transferring assets to a spouse before selling, a couple can double their tax-free allowance, potentially reducing the taxable gain.

If one spouse pays a lower rate of income tax, transferring an asset before sale could result in a lower CGT rate.

Capital gains are taxed at different rates depending on income tax bands: 18% if within the basic-rate band, and 24% if in the higher-rate band.

interactive investor’s calculations show that if a higher-rate taxpayer owns shares with a £20,000 capital gain, they would pay 24% CGT, or £4,080 after the £3,000 exemption, if they sell.

If they transfer half of the shares to a basic-rate taxpayer spouse, both can use their CGT allowances (£3,000 each), leaving £7,000 taxable at 18% CGT (£1,260) and £7,000 taxable at 24% (£1,680), resulting in a £2,940 tax, instead of £4,080.

Source: interactive investor. Assumptions - one higher-rate and one basic-rate taxpayer, half of the asset value transferred to a spouse before disposal.

Dividend tax

Each individual has a dividend allowance of £500. By splitting investment ownership, a couple can double the tax-free dividend allowance, reducing taxable income.

Transfers between spouses are tax-free. If one spouse is in a lower tax band, they can receive dividends at a lower tax rate: 8.75%, 33.75%, and 39.35% for basic, higher, and additional-rate taxpayers, respectively.

interactive investor’s calculations show that if a higher-rate taxpayer with a shares portfolio that yields a dividend income of £5,000 would pay 33.75% dividend tax, or £1,519 after the £500 exemption.

If the share portfolio is shared equally between the higher rate taxpayer and their basic-rate taxpayer spouse, both can use their dividend tax allowance (£500 each), leaving £2,000 taxable at 8.75% (£175) and £2,000 taxable at 33.75% (£675), resulting in a £850 tax bill, instead of £1,519.

Source: interactive investor. Compares tax on dividend income if shares portfolio is shared between spouses (one higher and one basic rate taxpayer), compared with if shares are held entirely by a higher-rate taxpayer.

Inheritance tax (IHT)

Transfers between spouses (or civil partners) are completely exempt from IHT, regardless of the amount.

Doubling the nil-rate bands

Each individual has a nil-rate band (NRB) of £325,000, meaning the first £325,000 of their estate is IHT-free. If assets are left to a spouse, the unused NRB transfers to them, effectively doubling the couple’s tax-free allowance to £650,000.

If passing the family home to direct descendants (children or grandchildren), each person gets an additional £175,000 residence nil-rate band (RNRB). Like the NRB, if unused, the RNRB can be transferred to a spouse, increasing the total tax-free allowance to £1 million (£650,000 + £350,000).

Note: Estates worth over £2 million will start to lose the RNRB, as it will be withdrawn at a rate of £1 for every £2 over £2 million.

Source: interactive investor.

ISAs

Each individual has an annual ISA allowance of £20,000, meaning a married couple can collectively contribute up to £40,000 per year into ISAs, allowing them to shelter a significant amount of investments and savings from tax.

You can inherit your spouse’s ISA allowance

The inherited ISA allowance, or Additional Permitted Subscription (APS), allows a surviving spouse or civil partner to inherit the ISA benefits of their deceased partner. This means they can add an amount up to the value of the deceased’s ISA savings to their own ISA allowance, in addition to the standard annual ISA limit of £20,000 for adults. For example, if your partner had £10,000 in ISAs, you could contribute this amount to your ISA on top of your current allowance, enabling you to shelter more savings from tax.

Pensions

Boosting a non-working spouse’s pension

Even if a spouse has little or no earnings, they can still contribute up to £2,880 per year into a pension and receive 20% tax relief, meaning the government tops it up to £3,600. This can be a great way for a higher-earning spouse to boost the pension of a non-working partner.

A high earner can make pension contributions on behalf of their spouse to help build their retirement savings. While contributions must be made in the spouse’s name, it helps to maximise the family’s overall pension savings – with the added benefit of tax relief.

Pension income splitting in retirement

Pension income is taxed individually, meaning each spouse benefits from their personal allowance (£12,570 at present). If only one spouse has a large pension, it could push them into a higher tax bracket, while the other’s allowance remains unused.

Couples can manage withdrawals strategically so that both spouses stay in lower tax bands, reducing the overall tax burden.

There are far more protections if the relationship ends

While it’s not a topic anyone enjoys contemplating, the financial security marriage provides in the case of separation or death is undeniable. Married couples have clearer legal rights when dividing assets or accessing a partner’s estate, which can help avoid costly disputes.