US Edition
Five reasons it pays to be married (and one that might make you think twice)
Telegraph Money reveals the financial risks and rewards of being hitched
Loving your partner is reason enough to get married – but there are also a number of financial upsides to becoming a spouse or civil partner.
There are several tax breaks available that could potentially save you thousands, from maximising each other’s tax-free personal allowances, to protecting your cash from inheritance tax when you pass away.
However, with 41pc of couples getting divorced, according to figures from the Office for National Statistics, it’s also worth weighing up the risks, as a split can come with a hefty hit to your finances.
Telegraph Money asks wealth managers Quilter and RBC Brewin Dolphin how you can save money by getting hitched, and what the costs could be if the relationship doesn’t work out.
The inheritance tax spousal exemption
If you’re married or in a civil partnership, you can transfer assets to your spouse on death without having to pay any inheritance tax. This is known as the spousal exemption.
If the first person to die has not used some or any of their nil-rate band (£325,000) or residence nil-rate band (£175,000) allowances, these can also be transferred on death.
Shaun Moore, the tax and financial planning expert at Quilter, says this has the effect of creating an allowance of £1m for the couple collectively if the allowances weren’t used after the first death.
However, he says the residence nil rate band is “tapered” if the overall net value of the estate on death exceeds £2m. If this is the case, the tax-free amount will reduce at a rate of £1 for every £2 over the £2m threshold.
In addition, anyone whose spouse or civil partner has died with money held in an Isa can benefit from the “Additional Permitted Subscription” (APS) allowance.
This means a surviving spouse can inherit the entirety of their loved one’s Isa savings by boosting their own Isa allowance – in addition to being able to save up to £20,000 of their usual allowance. The money can therefore continue to be shielded from the likes of income and capital gains tax.
If a couple are not married – even if they live together and have children together – they won’t be able to use the exemption. So, if one partner were to leave their estate to the other when they die, there could be a sizable inheritance tax bill today, charged at 40pc of anything over the available tax-free allowances.
Asset transfers to reduce capital gains tax
A married couple can transfer assets to each other without incurring a tax bill, which can in turn save on capital gains tax.
This could be a good idea if one of the couple is a higher-rate taxpayer, but their spouse does not pay tax – for example, if they do not work or earnt less than the personal allowance of £12,570. As capital gains tax can vary depending on your tax band, it makes sense to transfer assets to the lower earner, according to RBC Brewin Dolphin.
When it comes to sell or dispose of the assets, the person with the lower tax rate will either pay 10pc tax on any profits exceeding their tax-free allowance, or 18pc if selling a property that’s not your main home. If the assets were left with the higher earning spouse, they’d be charged 20pc, or 28pc on a property.
In the case of holding shares, making a transfer to a lower-earning spouse can be beneficial even if you don’t sell the assets, as any income produced could also be taxed at a lower income tax rate.
Reduce income tax with marriage allowance
If one member of the couple has any unused personal allowance they can transfer 10pc of it – £1,260 – to their spouse, as long as they are a basic rate taxpayer.
As a couple, this would cut your tax bills by up to £252 for the financial year, according to RBC Brewin Dolphin. The basic-rate taxpayer essentially has their personal allowance boosted to £13,830, meaning they can keep more of their earnings.
This is also an allowance you can backdate to 2019-20, meaning you could potentially get a rebate of up to £1,256.
One thing to note: if the lower-earning partner has an income of less than £12,570 but more than £11,310, they could end up having to pay income tax, having reduced their own tax-free allowance. With this in mind, you should weigh up whether setting up the allowance is worth it.
Providing for your spouse with your pension
If you have a final salary pension scheme, you can usually have some form of your pension paid out to your spouse when you die.
For couples who aren’t married or in a civil partnership, the inflation-linked guaranteed income offered by the pension could stop if the surviving spouse is not classified as a dependent.
Mr Moore says it is worth digging around to find out what your employer’s pension offers.
He says: “Some employers offer spousal pensions if an employee is survived by a married or civil partner, while death in service payments can also be offered.
“If you are not married, or you have not filled out a nomination form, then these are often paid to the estate, and thus under intestacy rules unmarried partners may not be entitled to any of it.
“If you are in retirement and your spouse or civil partner dies you may also be entitled to inherit an extra payment on top of your own state pension. The rules around this can be complicated, and depend on your state pension age, so it is best to contact HMRC to see what you may be eligible for.”
Intestacy rules favour spouses
Having a will is recommended to avoid problems with your wealth being passed to your family and friends, but if there is no will “intestacy rules” will apply. These favour married or civil partners.
The rules state that married or civil partners with children will receive all personal property and belongings of the deceased, as well as the first £270,000 of the estate. Anything above this will be split, half to the spouse, and half to the children.
If the couple does not have children, the spouse receives the entire estate.
However, if the couple is unmarried, intestacy rules will cut out the partner, instead splitting the estate just among the children. If there are no children, the estate will move to the next-closest members of the deceased’s family – and if there is no one suitable, the estate will go to the crown.
Considerations around divorce
Unmarried couples do not share the rights, responsibilities, protections or status held by married couples and civil partners, regardless of whether they live together.
If you live with your partner, you retain your individual assets when you separate regardless of your financial situation, or theirs.
If you’re married, you have to add most of your assets to the “matrimonial pot” and divide them when you get divorced, with the starting point being a 50/50 split.
Ammo Kambo, financial planner at wealth manager RBC Brewin Dolphin, says: “Paying solicitors can be very costly and erode the total value of what’s left over after a divorce is finalised, which can be a challenge to predict – particularly if the marriage has deteriorated and things have turned sour.
“If you weren’t married or in a civil partnership, you’ll have to share the costs of looking after any children you have together, but you don’t have to support each other financially when you separate.”
The most common financial tie for an unmarried couple would be a jointly owned property which would need to be split based on the terms of the mortgage.
There’s also the issue of pensions. Mr Moore warns that these crucial assets often get ignored by lawyers.
He said: “Dividing pensions equitably is of vital importance to avoid later life poverty, particularly if one person has not had the same opportunity to build a large enough pension pot of their own and will be unlikely to have enough time to save adequately for their future.
“This is most often the case for women who took time out of work while they had young children.”
On this topic, it’s worth being sure to change the pensions death benefit nomination form following a divorce – otherwise, your pension funds could still go to your former spouse when you die, which may not fit with your wishes.
Do the costs of divorce outweigh the benefits of marriage?
More than 40pc of marriages now end in divorce, with the average cost of legal fees and lifestyle costs at £14,561, according to Money Helper.
Whether the costs of divorce are bigger than the perks of marriage depends on your circumstances.
Mr Kambo said: “In theory, with a clear-cut situation with no complications, you could lose less had you not been married, as a large part of divorce costs go on legal fees.
“If you were not married but lived together, each party would need to agree how their possessions should be divided.
“If this was not possible, legal advice or mediation could be required, at additional cost.”
Mr Moore agrees that the cost of splitting up can be steeper for married couples.
He said: “For those who are married, a divorce generally impacts wider assets, such as pensions, which would likely be divided between the two and could result in the separation ‘costing’ more.
“There is an inherent bias that divorce ‘costs’ men more than women, but this is largely as a result of women often taking the financial hit when it comes to childcare responsibilities. The division of assets such as pensions helps to keep things fair.”
There isn’t this protection for a lower-earning partner in a non-married couple; Mr Moore said one member of a couple could feel they have lost out because they are not entitled to their partner’s assets.