Following on from our recent guidance on NHS death in service benefits and the importance of having an up to date will, from a tax point of view (an unromantic proposition to say the least), there are several tax benefits worth bearing in mind when it comes to marriage. Additionally, many couples who have ‘married’ through anikah ceremony (Islamic marriage) are not aware that that their marriage is not valid under English law and as a result, spouses have no rights when it comes to divorce or may face potential obstacles and even unnecessary taxes of up to 40% on death.
What are the tax advantages of marriage in lifetime?
· Married couple can make tax free gifts of capital appreciated assets such as shares or property etc. to each other before selling them to a third party to take advantage of both of their annual exemptions of £12,300. For example, if you are disposing of an asset in your personal capacity, you may want to consider transferring a portion of the capital rights to your spouse in order to take advantage of their capital gains tax free allowance.
· Married couples can also restructure their assets to reduce their overall income tax liability if one partner pays a lower rate of tax than the other, or if one is impacted by the annual pension tapering charge. For example, income generating assets like savings or investments can be transferred into the name of the lower rate taxpayer (tax free) to take advantage of their basic rate allowances.
· The marriage allowance permits a spouse or civil partner who does not pay income tax to transfer up to £1,060 of their personal tax-free allowance to their partner. But if that partner is a higher rate taxpayer, earning more than £42,386 a year, the couple will be excluded from the tax break.
What are the tax advantages of marriage on death?
· Married couples or civil partners can pass assets on death free from IHT. Whereas the survivor of an unmarried couple may pay 40% IHT on assets above the £325,000 Nil Rate Band (tax free allowance)
· A surviving spouse who inherits their other half’s estate will also inherit their Nil Rate Band (£325,000) too, giving the survivor a possible total of £650,000 to leave to their children before IHT is payable.
· If deceased estate is worth more than the basic IHT threshold, their estate may qualify for the residence nil band (RNRB) before IHT is due. For 2020/21 this is an additional £175k threshold.
Of course, it is not for us to doubt the motives of love and affection between couples, but marriage does bring significant tax breaks both in lifetime and death. Additionally, Islamic married couples really should be checking their status as they may unintentionally engage in ineffective tax planning or find themselves hit with an unexpected 40% IHT liability. A simple civil ceremony can easily resolve any potential issues.