This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).
Today in 2021, few people would admit to marrying for money. Yet here in the UK, there are still financial advantages to tying the knot compared to being single or cohabiting. Here at Hanson Financial Services, our aim in this article is not to defend this state of affairs. Rather, our aim is to show married readers (and civil partners) how they can use current rules to reduce their tax bill. You can find a summary below, but please do contact us if you want more information.
Individual Savings Accounts (ISAs)
In 2021-22, each UK resident is allowed to commit up to £20,000 into their ISA(s) per tax year. The money will then be protected from tax on the interest, dividends and capital gains inside the ISA “tax wrapper”. Once the April 6th deadline passes, however, any unused ISA allowance will be lost – it cannot be “carried over” to the following tax year.
What can you do if you have maxed-out your ISA, however? One option would be to transfer the cash/assets to your spouse or civil partner, so they can put it into their own Cash ISA or Stocks and Shares ISA. Each of you have your own ISA allowance, even if – in the eyes of the law – you both own the money as a legally-bound couple (e.g. in the event of death/divorce). Unmarried couples can technically do this too. However, bear in mind that you will not automatically get the money back as an inheritance, should your partner die. They will need to specify this in their Will and the amount may be subject to inheritance tax (IHT).
Do you earn more than your spouse? If you are married or in a civil partnership, the partner who earns less can transfer any unused personal allowance to the other, higher-earning person. In 2021-22, the tax-free personal allowance is £12,500 and up to £1,260 can be transferred – i.e. a potential tax saving of £250. Unmarried couples cannot do this, however.
Perhaps you have left retirement planning a bit late, but you are earning decent income now and want to start saving. Or, maybe you have suddenly received a large sum from a business sale or an inheritance. In these situations, you need to be mindful of your annual allowance on pension contributions. In 2021-22, this limits you to £40,000 per tax year (or up to 100% of your earnings, if these are lower). It is possible to go past this limit by leveraging unused allowances from the previous three tax years. However, if these avenues are still too constraining, then you could consider putting some of the money into your spouse’s pension (assuming they still have unused allowance available).
Capital gains tax
In 2021-22, each person can generate up to £12,300 in capital gains without attractive capital gains tax (CGT). This does not include the sale of your main home, of course. Yet it can apply to the sale of shares, bonds, cryptocurrencies and property investments (e.g. Buy To Lets) which have made a profit. One way to mitigate this is to put some of the assets into an ISA. However, another option could be to transfer ownership of the assets to your spouse prior to the sale. This would allow him/her to then utilise their own unused CGT allowance.
Do you own shares in businesses which pay you a dividend income? If so, then tax on your dividends can be reduced by holding the assets in an ISA. Outside of this, you are allowed to earn up to £2,000 dividend income per tax year without attracting dividend tax. Once the income exceeds this, however, a rate of 7.5% is applied to Basic Rate taxpayers and 32.5% to those on the Higher Rate. To mitigate this, one option would be to transfer some of the dividend-making assets to your spouse, who can make use of their own £2,000 tax-free yearly allowance.
Inheritance tax (IHT)
Last but not least, married couples and civil partners enjoy significant advantages over others when it comes to estate planning. In 2021-22, when you die the value of your estate is usually taxed at 40% once it exceeds £325,000 (excluding exceptions such as the additional nil rate band). However, any unused allowance automatically transfers to your surviving spouse – free from IHT. This can effectively double the IHT allowance of a married couple when both people eventually die and wish to pass their assets onto children. Please bear in mind that unmarried people cannot do this, even if you have lived together for years and have had children.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039Or email via: [email protected]