How Marriage Can Reduce Your Tax Bill

Capital Gains Tax

One of the best ways in which you can lower the taxes you pay on capital is by transferring assets to your partner tax-free. The government sees marriage as a way to benefit couples, and gifting assets to each other allows you to reap the benefits of lower tax rules. Whoever owns the asset is liable for the tax, so a partner in a lower tax band can help reduce the amount you pay as a couple. In a way, a reduction in capital gains tax is its own sort of marriage allowance.

If a higher taxpayer owns a property that’s rented out, they will be responsible for paying 40% income tax on the rent they receive. If their partner doesn’t work, they won’t be using any of their personal allowance, so the higher earner can transfer the property to their partner to make use of it. The property can be transferred tax-free and the rental income is then not subject to any tax, saving 40% in what you may have been paying as a couple.

Capital gains tax in relation to selling property is different to other assets. Depending on the taxpayer, property is either subject to 28% or 18% tax. If property is owned by the higher taxpaying partner, it can be transferred to the lower taxpayer when it comes to selling. This way, you’ll reduce your tax bill by 10% for the property. This is another way in which marriage allowances can work for you.

Inheritance Tax

For Couples

Couples that aren’t married won’t be able to receive all of their partner’s income if they die. Any income bequeathed to an unmarried partner is still subject to a hefty 40% inheritance tax. If you’ve been together as a couple for decades, this can come as a massive blow. In order to avoid this, and make the most of other marriage allowances, getting married is the answer.

As long as you’re married, any money left to your partner will be transferred to them in full. They will be responsible for their estate, without being punished by any form of inheritance tax. You can see the potential savings for this kind of marriage allowance in the interactive graph below.

If you or your unmarried partner had £5,000 in savings at the time of death, only £3,000 of this will go to the partner, while the remaining £2,000 will be paid in tax. On the more extreme end of the scale, £40,000 is paid in tax on £100,000 of savings. By benefitting from the marriage allowance of reduced inheritance tax, you can receive the full amounts instead.

For Direct Descendants

In the case of passing on inheritance to direct descendants, married couples can double the individual allowance of £325,000 to £650,000. If one partner dies, the surviving member inherits their allowance, effectively keeping the £650,000 limit to themselves. This allows them to pass on collective assets to loved ones.

With the main residence, if it’s given to direct descendants, the marriage allowance of reduced inheritance tax means that you can avoid paying any tax on this up to the value of £1 million. This can save a lot of heartache and anger when it comes to the loss of a loved one.

Income Tax - The HMRC Marriage Allowance

Sharing your tax-free personal allowance is another reason why marriage is good for reducing your total tax bill. By making use of the Marriage Allowance, the lower earner can transfer their allowance to their higher earning partner to reduce the amount of tax that they pay. This only works if the lower earner doesn’t earn more than £12,570. By not paying any tax, the lower earner clears the higher earning partner to pay a slight reduction in their tax bill for their income. This gives you an extra £252 a year.

How do I claim a Marriage Allowance refund?

When applying for Marriage Tax Allowance, you can backdate it by up to four years, which can give you a tidy sum. As well as the current year, backdating your application for years that you qualify can give you the following amounts:

• £252 for 2023/2024

• £252 for 2022/2023

• £252 for 2021/2022

• £250 for 2020/2021

• £250 for 2019/2020

In total, the full five years of the HMRC Marriage Allowance entitles you to £1,256. Backdated amounts are usually paid as a lump sum, but the current financial tax year will be paid to you through an adjustment of your tax code.

What you need to know about Marriage Allowance.

Pensions

The final marriage allowance benefit comes from the continuation of pensions after death. While the macabre subject needs to be addressed, the benefits are meant to help with the grieving process. Depending on the type of pension that the deceased partner had, you could be entitled to an increase in your payments or some of theirs. State pension services stop after death, but you could receive extra payments because of this.

Defined contribution pensions can continue to be paid to the surviving partner, but different tax rules apply depending on whether they died before or after reaching 75. Understanding what kind of pension your partner has is crucial to receive a kind of pension marriage allowance.