A marriage of tax convenience?

Just Married Car - tax consequences of marriage

Tax

Julie Hutchison

13th February 2014 at 11:10am

Last year I wrote a blog about whether getting hitched improves your financial future, with some evidence to support that it does.

The marriage proposal

And now, six months on, marriage itself is being re-defined in 2014, as the legal scope of marriage is being broadened to encompass same-sex as well as opposite sex unions.

When speaking to a colleague about whether he and his civil partner would want to convert their civil partnership into a marriage – they hadn’t decided yet if it was right for them. But it wasn’t something he thought he would see in his lifetime, and he was proud that this option was soon to be available in the UK for same-sex couples

Approaching marriage with a cool head rather than a romantic heart in the run-up to Valentine’s Day, I thought I’d cast my tax eye over the inheritance tax consequences of marriage.

Saving inheritance tax

This is the big tax reason to get married! Married couples and civil partners enjoy a significant tax saving when it comes to inheritance tax. It involves the double whammy of the spouse exemption and something called the ‘transferable nil rate band’. Married couples and civil partners enjoy a significant tax saving when it comes to inheritance tax. It involves the double whammy of the spouse exemption and something called the ‘transferable nil rate band’. The ‘nil rate band’ is simply the bit of your estate which enjoys a 0% inheritance tax rate. In plain English, here’s how it works:

Let’s assume that a married couple have assets worth £700,000, owned 50/50.

One spouse dies and leaves everything to the surviving spouse, via their Will.

There’s usually no inheritance tax to pay here, as the spouse exemption applies.

Some years later, the surviving spouse then dies, and leaves £700,000 to their children.

At that point, the estate has an inheritance tax ‘nil rate band’ i.e., 0% chunk of £650,000 (using tax year 2013/14 rates). That’s because the earlier deceased spouse’s estate didn’t use the nil rate band when the whole estate was earlier inherited by the other half of the couple. This nil rate band ‘transferred’ to the survivor’s estate, boosting the £325,000 0% band to £650,000.

This means only £50,000 of their combined estate is subject to inheritance tax at 40%, leaving a tax bill of £20,000 when the surviving spouse dies.

This is also how the rules would work for civil partners.

The costs of cohabiting

In a similar situation but with a cohabiting couple (not in a civil partnership) and children, the inheritance tax bill would be much higher, with less ending up in the hands of the children as a result.

There would be an inheritance tax bill of £10,000 to pay when the first partner dies. This is calculated as £350,000, less the nil rate band of £325,000, leaving £25,000 to be taxed at 40% (£10,000). The overall inheritance tax bill on the cohabiting couple’s estates is £156,000, compared to £20,000 for the married couple.

The surviving partner then inherits £340,000 from the first partner, to add to their own £350,000.  On his/her later death, their estate of £690,000 would only have one nil rate band (£325,000).  That leaves £365,000 to be taxed at 40%, leaving an inheritance tax bill of £146,000.

The overall inheritance tax bill on the cohabiting couple’s estates is £156,000, compared to £20,000 for the married couple.

A trip to the Registry Office?

If you ask a lawyer who works in this field, most can tell you an anecdote about advising a cohabiting couple to get married, or enter a civil partnership, to ensure more of their estate is inherited by their loved ones. In my example above, £136,000 more could end up with the children, if the parents got married/civil partnered.

You’ll have your own views on marriage, civil partnerships, tax and what sounds fair.  Post your comments below, we’d like to hear from you.

This blog is not tax advice.  You should speak to an expert to get advice on your own circumstances.  The calculations assume asset values remain unchanged and no lifetime gifts have been made.  The calculations are based on tax year 2013/14 and assume all parties are domiciled in the UK. 

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