5 Marriage Tax Benefits in the UK
- What are the tax benefits of marriage?
- Are there marriage tax advantages?
- Do you pay less tax if you are married?
What’s not to love about married life? The ceremony, the getting together of two families and the possibility of many happy years together in each other’s company are just some of the perks. It’s a perfect union of the physical and emotional. But are there marriage tax benefits?
While there’s much more to marriage than simply spending the rest of your life with the person you love, when it comes to the financials, you can also end up saving money on tax.
We’ve put together the top five marriage tax benefits and explained them in this article.
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1. and 2. HMRC Marriage Allowance and Reduced Income Tax
The first two marriage tax benefits go hand in hand. You’re able to receive reduced income tax because of the allowance, but you’re only able to apply for the Marriage Allowance because you’re a married couple (or in a civil partnership).
The Marriage Tax Allowance, introduced in 2015, is available to couples either married or in a civil partnership. You effectively transfer your personal allowance to your higher earning partner in order for them to receive a tax break. Unlike other marriage tax benefits, this might not be worth as much.
Your personal allowance is the amount of income you’re entitled to without being taxed on. You’re able to transfer £1,260 of this to your partner, which increases the limit for when they need to start paying tax. As long as one of you doesn’t pay tax and the other does, the Marriage Allowance benefits you.
You’re able to claim the Marriage Tax Allowance if all of the following apply:
Neither person was born before 6th April 1935
One person pays tax at a rate no higher than the basic rate (20%)
The other person doesn’t use all of their personal allowance (and is also not taxable at a higher rate)
After you apply for the Marriage Tax Allowance, you don’t need to reapply. You’ll automatically receive the tax break every subsequent year. While this isn’t as high as other marriage tax benefits, you can backdate the claim by up to four years, which you’ll receive as a lump sum.
While previous years aren’t worth as much, if you apply for this year and backdate four years, the five year amount for your Marriage Tax Allowance for the total amount would be over £1,200. You can only apply for the years in which you both qualify, so make sure you’re entitled to it before you make a claim.
The result of this is that the higher earner will have a higher tax threshold, meaning you’ll pay a reduced amount of income tax. So these marriage tax benefits are almost one and the same.
3. Pay Less Capital Gains Tax
The third in the list of our marriage tax benefits is to do with capital gains tax. There are advantages to married life that go beyond the material, and when it comes to capital gains tax, married couples have an upper hand over partnered individuals.
Some assets sold incur capital gains tax on any excess in value that the asset has accrued. It is based on the annual exemption of £12,300 for an individual or £24,600 for a couple. The rates are different for property than other assets. It’s also based on your rate of income tax. A higher rate will incur 28% tax on any gain in residential property and 20% on gains from other chargeable assets, while a basic rate taxpayer will incur 18% for any gain on property and 10% tax on any other gains. This marriage tax benefits partners who have tied the knot as they’re able to gift assets without incurring any tax.
For example, a home valued at £300,000, but bought at £200,000 has a potential gain of £100,000. In this instance, capital gains tax would be £28,000 (28%). If you transfer the asset to your partner, you can reduce the overall tax. Using the same example, a lower tax paying partner will have a reduced capital gains tax of £18,000 (18%).
High rate taxpayer
Basic rate taxpayer
£300,000 property price
£300,000 property price
£200,000 buying price
£200,000 buying price
£100,000 potential gain
£100,000 potential gain
£28,000 (28% CGT)
£18,000 (18% CGT)
This works in your favour if both halves of the relationship are in two different tax bands. If the partner on the higher tax band gifts an asset (tax-free) to their partner in the lower tax band, this will lower the amount of capital gains tax. It’s important to get financial advice before transferring assets between partners to benefit from any marriage tax benefits, just so you’re clear on the amount you’ll need to pay.
See our guide if you want to know how long it takes to get a rebate for marriage tax allowance.
4. Reduced Inheritance Tax
The fourth entry of our marriage tax benefits is in regards to inheritance tax. This is tax paid on gifts to others, including property, over £325,000 (nil-rate band) after you die. It’s charged at 40% on any excess over this nil-rate band. However, an individual is able to leave anything to his or her married partner free of inheritance tax.
Together, a wedded couple has the added advantage of being able to double this band to £650,000. Since 2017, this marriage tax benefits direct descendants as it has been extended to inheritance. There is a bonus of leaving anything to your children for unmarried couples, but this is £125,000 below the married bonus.
Married couples benefit from reduced inheritance tax if their main residence is being inherited by descendants. This marriage tax means you can avoid inheritance tax up to the value of £1,000,000. Alternatively, it can be transferred to your spouse in death as long as they live in the UK. The spouse is also able to inherit any unused portion of the deceased partner’s nil-rate band. This can effectively raise your individual band to £650,000. While an unmarried individual’s nil-rate band will stay at £325,000, this is just one way in which this marriage tax benefits you.
As a married couple or one in a civil partnership, you can also make lifetime gifts to your partner without them being treated as potentially exempt transfers for inheritance tax purposes. So the marriage tax benefits keep on giving. You will be charged inheritance tax to anyone else if the person dies within seven years from the date of the gift. For the avoidance of doubt, the transfer to your partner must be a genuine, outright gift in order for it to be tax exempt.
Finally, the last of our marriage tax benefits is that some pensions continue after you die, meaning your spouse will benefit instead of the money going to waste. As long as there is a final salary scheme, the surviving partner can benefit, but you’ll have to check the particulars, as some pensions don’t pay out if the couple is living together. Others will only pay out for financial dependents, while you might be able to nominate a partner in some instances.