Why will it cost us more tax if we don’t get married?

Recent census data shows us that approximately 1 in 6 of all couples living together are unmarried. This number has more than doubled in the last decade alone, as more and more people are choosing to cohabit before marriage, or not choosing to marry at all.

So the question you may not have considered… are there tax advantages, or disadvantages for unmarried couples?

When it comes to tax obligations unmarried couples may enjoy some advantages over their married peers. However, married couples have access to far more benefits. We look at how careful planning can help you avoid any painful consequences if you’re not tying the knot.

We’re certainly not telling you to get married just to avoid a tax bill – but you may want to be aware of how you can minimise one!

The two biggest differences to highlight

The biggest differences for unmarried vs married is in Capital Gains Tax, Inheritance Tax and Income Tax.

Let’s delve into those…

Capital Gains Tax (CGT)

Without a will in place, transfers of assets are not tax free for unmarried couples, where they are for their married peers.

When you’re selling or gifting assets, it’s important for CGT purposes to state if the seller is connected to the recipient – and in what way.

The answer to this will affect:

The cost of gifting assets to a connected party

Transactions between spouses are “no gain, no loss”. The disposal value used is equal to the original cost incurred, so that the net result is zero.

If you’re gifting an asset to a relative or an unmarried partner, the disposal value must be the current market value.

Translation

You could therefore gift an asset to a relative or to your unmarried spouse, receive no cash in return (because it is a gift) and yet end up with a large tax bill to be paid, as if it were a sale.

What can you do?

In the case of business assets, in some instances, gift relief may be available to reduce capital gains tax. For other asses, mainly land or buildings, which are not eligible for tax relief, if the disposal results in a large CGT bill, it may be possible to settle the liability in instalments.

Inheritance Tax

For married couples, the full spouse exemption means that couples can leave their entire estate to their surviving spouse free of inheritance tax.

This is not the case for unmarried couples. When one passes away, Inheritance Tax (IHT) is payable at 40% on assets over the nil-rate band (which is currently £325,000). This may result in a significant IHT tax bill, potentially leaving the surviving partner with insufficient funds to settle it.

Translation

You may remember that Ken Dodd married his wife two days before he passed away, ensuring that the tax man didn’t take £2 million from her in Inheritance Tax!

What can you do?

Is it fair that unmarried couples are at such a disadvantage? Some argue that those who make the legal and personal commitment to marry should be rewarded with increased legal protection.

So, is the simple answer to get married, regardless of your personal views on the union? This would certainly take the romance out of the decision…

The simplest step you can take to day is to make a will.

There are ways in which assets can be left in a will to a cohabiting partner in a tax efficient manner. For example, instead of leaving assets absolutely, they can be left in a discretionary trust. A letter of wishes will accompany the will guiding the trustees on how the assets should be dealt with. But, a will isn’t a fail safe against potential IHT liability. Ask our Will specialist Mark Underwood about all of the details, and how best to go about preparing a will, at the button below.

Who thought not getting married would be such a complicated arrangement?

All of these options and considerations do leave you scratching your head as to the best way to minimise paying a lot of tax on your choices. More and more of us are choosing to cohabit rather than get married – so give us a call if that’s you, and you’d like to know what your options are.

If you already know you need advice on a Will – visit our A4G Legacy site to see how our expert, Mark, can help.