Taxes for Unmarried Couples

Taxes for Unmarried Couples

Married couples enjoy greater tax benefits than unmarried couples. If you are cohabiting – meaning you live together but you are not married or in a civil partnership – you might want to explore this in greater detail. There may be ways of limiting your tax liabilities. Or you may even decide that it pays to get married after all.

Income tax

The marriage allowance allows someone to transfer £1,250 of their personal income tax allowance to a husband, wife or civil partner. One partner must be a non-tax payer (usually because their income is below £12,500 per year), while the other must pay income tax at the basic rate (where their income is between £12,501 and £50,000 per year). If a couple meets the criteria, they can save £250 a year. This might not sound like much, but if you add this up over an entire lifetime, it amounts to a significant saving.

Cohabiting couples are not entitled to combine their personal tax allowance, regardless of how long they have been together.

Capital gains tax

Couples who are married or in a civil partnership can also combine their capital gains tax (CGT) allowance. For example, imagine the sale of an asset produces a CGT bill. If the asset is held jointly, it is possible to use each person’s CGT allowance, increasing the threshold over which tax must be paid. If an asset is not owned jointly, there is nothing to stop an owner transferring part of the asset to a husband, wife or civil partner. This has the same effect.

Just like income tax, cohabiting couples cannot combine their CGT allowance. However, unmarried couples can take advantage of CGT main residence relief – something married couples cannot do. This means that if each cohabiting partner owns a property, each person can claim an exemption.

Inheritance tax

Perhaps the biggest tax advantage for married couples over unmarried couples comes after death. Husbands, wives and civil partners do not have to pay any tax on money or property left to them by a spouse. They can also combine their Inheritance Tax (IHT) allowance. When the second spouse dies, he/she can leave up to £650,000 worth of assets before IHT must be paid. This could potentially save their loved ones from paying thousands of pounds worth of ‘death duties’.

Cohabiting couples, on the other hand, can only leave £325,000 worth of assets until their estate becomes liable for inheritance tax.

What can unmarried couples do?

Unmarried couples may feel aggrieved that married couples enjoy better tax breaks. The law is not without its critics and there may be changes in the future. In fact, the Cohabitation Rights Bill is currently working its way through Parliament. If passed, the new legislation would give cohabiting couples the same financial rights as married couples, in the event of a partner’s death.

For now, however, the tax laws remain the same. If you are not married and you want to limit your tax liabilities, please speak to our wealth protection team. It may be possible to protect the financial position of both you and your partner via devices such as trusts, Wills and legal agreements. We can determine the best strategy for your particular situation.