What’s Better for My Tax Position: Cohabiting, Marriage or Civil Partnership?

The sun is finally shining after a gloomy, grey winter, which can only mean one thing – wedding season is fast approaching! But did you know that your marital status can have an impact on your tax position? With couples increasingly choosing to be in ‘Common law’ relationships, the UK tax law currently discriminates against these types of arrangements.

Whether you’re cohabiting, married or in a civil partnership, the nature of your personal relationship can impact the way your tax is treated.

The Marriage Allowance enables a person to transfer 10% of their personal allowance (currently 10% of £12,570) to a spouse, partner, or civil partner. One partner must be a non-taxpayer (usually because their annual income is less than £12,570), while the other must pay income tax at the basic rate (if their annual income is between £12,571 and £50,270). If a couple meets the requirements, they can save £250 per year. This may not seem like much, but when multiplied over a lifetime, it adds up to significant savings.

Unfortunately, cohabiting couples, regardless of how long they have been together, are not entitled to combine their personal tax allowance.

Capital Gains Tax

Assets such as shares can be transferred between spouses/civil partners on a ‘no loss, no gain’ basis when it comes to Capital Gains Tax (CGT). In effect, the receiving partner is deemed to have purchased the asset at the same price as the donating partner. This means that such transfers will not result in an immediate capital gain. Because the gains on these assets are split, both individuals can use their tax-free allowance when they are eventually sold.

Inheritance Tax

The most significant tax advantage for married couples over unmarried couples occurs after death. Husbands, wives, and civil partners are not required to pay taxes on money or property left to them by a spouse. They can also combine their Inheritance Tax (IHT) exemptions. When the second spouse dies, he or she can leave up to £650,000 in assets before inheritance tax is due. This could potentially save loved ones thousands of pounds in ‘death duties.’

Cohabiting couples, on the other hand, can only leave £325,000 worth of assets until their estate becomes liable for inheritance tax.

What can Unmarried Couples do?

As you can see, being in a married couple or civil partnership does have its tax perks. But are there any tax benefits for cohabiting couples to be aware of?

Unmarried couples who own a property jointly can split their property income however they want, regardless of ownership percentage. For married couples, any income is generally deemed to be earned 50/50 by each individual – though they can have it taxed in proportion to actual ownership, if that’s in a different ratio, by each completing a Form 17 and submitting this to HMRC with documentary proof of actual ownership proportions.

For capital gains tax purposes, married couples can only choose one property to be their primary residence. On the other hand, unmarried couples can designate different properties as their primary residence, however they do need to reside in the property for it to qualify.

Some other good news for unmarried couples in the future is the Cohabitation Rights Bill, which is currently working its way through Parliament. If passed, the new legislation would give cohabiting couples the same financial rights as married couples.

However, the tax laws remain unchanged for the time being. It may be possible to protect your own and your partner’s financial position using devices such as trusts, wills, and legal agreements.

Get in touch to Arrange a Finance Health Check

If you are planning any significant asset acquisitions or disposals, here at Hysons, Chartered Accountants, we are a highly qualified and knowledgeable team, ready to provide any advice and help you may need. Even innocuous things like gifts between spouses can be caught up in settlements legislation, so it’s important to consider your marital status.

Get in touch today to find out how we can help you with your personal accounting services.