The government plans to move rapidly to a digital only approach to communications with HMRC to reduce admin costs and cut use of call centres
To achieve this the government intends to reform the rules about how taxpayers give consent to communicate digitally with HMRC by making it the default position.
The changes are in line with HMRC’s longer term strategy to increase the use of self-serve and digital channels and to provide services that are ‘easy to use, with increased support to remove barriers to digital services where appropriate’.
It also admits that HMRC guidance needs to be improved to make it more accessible and understandable for taxpayers.
In future, HMRC will provide less choice around the non-digital channels it offers to taxpayers such as telephone calls and post to reduce the use of these channels, where users are able to go digital.
HMRC’s aim is to improve the range and accessibility of its digital services and move as much taxpayer interaction to self-serve digital channels as possible. At the same time, HMRC will look to increase automation and the ability to self-serve in its non-digital channels wherever possible, while providing support for those who need it.
Many taxpayers already do some of their tax online, using their personal tax account, business tax account and the HMRC app. ‘As these services have been developed separately over the last few years, they have not always offered a unified and consistent experience to taxpayers,’ HMRC said.
As part of the overhaul, HMRC aims to introduce a new single customer account for all taxpayers.
HMRC aims to implement its first phase of transforming digital services through the single customer account by 2025. This will focus on transforming services for individual taxpayers and account functionality, with business needs addressed in later phases.
Part of the plan will focus on improving sign in, security and subscription to digital services. HMRC will also start rolling out features to enable taxpayers to change their details (phone numbers, emails, address, marital status) online in a single place and have those changes apply to all services to which they are subscribed.
The proposals also aim to reduce the volume of post sent out by HMRC, which currently sends around 70 million items by post annually, at a cost to the taxpayer of around £40m.
Over the next two years, HMRC will start to reduce the higher volume letters and forms it sends out on paper and will instead provide these through digital channels. It will also do this for some key inbound forms.
It has already confirmed that it will require the minority of digitally capable employers who still submit P11D and P11D(b) forms (reporting employee benefits and expenses) on paper to use online forms from April 2023. It will then move to providing digitally capable employers with P6 and P9 coding notices solely using digital methods.
HMRC is seeking views on whether all, but digitally excluded taxpayers should be required to register for income tax for self assessment (ITSA) online, through their digital tax account.
Using the digital by default approach, HMRC would assume consent from the taxpayer to receive future ITSA communications digitally, unless they opted out. HMRC would then deliver the taxpayer’s first notice to file digitally and require the first and subsequent annual ITSA returns to be delivered digitally.
Before implementing these changes HMRC said it would ensure there was a high level of taxpayer satisfaction with the digital registration service. It also said there would be sufficient advance notification of the move with advance communications with agents, accountants and taxpayers.
There are also plans to reform the repayment process with a push to digital only approach.
Recent research found that participants were keen to see fewer steps in the repayments process and some found the sign up and authentication process to be a barrier and were keen to see a simplified approach.
There was also low awareness of the process for claiming repayments digitally and taxpayers said that P800 notifications could often be missed or not acted upon.
On PAYE overpayments, HMRC plans to contact taxpayers to offer a choice between receiving a digital payment or requesting a payable order instead of sending a payable order after 21 days if the taxpayer takes no action.
This will help to prevent payable orders being sent to incorrect addresses and will allow taxpayers to self-serve and get their repayments more quickly, which will also reduce HMRC’s printing and paper costs.
HMRC is also looking at ways to improve the accuracy of tax codes and wants to better understand how it can try to get tax codes more reflective of an individual’s circumstances more quickly when circumstances change through job moves and additional of employee benefits such as company cars.
In the Budget, the Chancellor replaced the super-deduction tax relief with the three-year ‘full expensing’ regime from 1 April 2023
From 1 April 2023 until the end of March 2026, companies will be able to claim 100% capital allowances on qualifying plant, machinery and IT investments.
Full expensing allows companies to write off the full cost of qualifying plant and machinery investment in the year they invest.
The plant and machinery must be new and unused, must not be a car, given to the company as a gift, or bought to lease to someone else.
In his speech, Jeremy Hunt said: ‘We will introduce a new policy of ‘full expensing’ for the next three years, with an intention to make it permanent as soon as we can responsibly do so.
‘That means that every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits.
‘It is a corporation tax cut worth an average of £9bn a year for every year it is in place. And its impact on our economy will be huge.
‘This decision makes us the only major European country with full expensing and gives us the joint most generous capital allowance regime of any advanced economy.’
Companies investing in special rate assets will also benefit from a 50% first-year allowance during this period.
This will cut tax for businesses that want to invest, reducing their tax by up to 25p for every £1 they spend.
The Office for Budget Responsibility (OBR) predicts that full expensing will boost business investment by 3.5% every year.
At the same time, the Annual Investment Allowance (AIA) extension, confirmed at the Autumn Statement, provides 100% first-year relief for plant and machinery investments up to £1m, which is available for all businesses including unincorporated businesses and most partnerships.
Martin Dye, director at Evelyn Partners, said: ‘The introduction of full 100% expensing for capital expenditure on qualifying plant and machinery will be very welcome by businesses, particularly when faced with the end of the current super deduction coinciding with the increase in corporation tax to 25% from 1 April 2023.
‘It is disappointing the relief is still only available to companies within the charge to tax and excludes individuals and partnerships with individuals. This does feel like a missed opportunity to better align the capital allowances regime with the government’s wider strategies, particularly as investment decisions being made now will impact the UK’s ability to meet its net zero targets by 2050.’
Paul Pritchard, senior managing director in FTI Consulting’s UK tax practice, said: ‘With the increase in corporation tax to 25%, full capital expensing effectively results in the same economic benefit as the super-deduction it replaces.
‘Whilst full capital expensing is a welcome measure to encourage businesses to invest in new IT, plant and machinery, it is unlikely to benefit loss making businesses.’
The government introduced the super-deduction in 2021 to encourage companies to make additional investments, and to bring planned investment forward as the UK recovered from the Covid-19 pandemic.
The 130% relief allowed companies to cut their tax bill by up to 25p for every £1 they invest. It also granted businesses a 50% first-year allowance for qualifying special rate assets.
Road tax for car drivers is set to rise by 13.4% in line with the retail price index (RPI) from 1 April 2023
The Budget confirmed plans to increase vehicle excise duty (VED) from 1 April by the rate of RPI for cars, vans and motorbikes while rates for HGVs will be frozen for the next year.
For most drivers road tax now starts at £120 a year for cars producing 76-90/km ranging up to £585 (151-170g/km).
The lowest polluting cars that produce 0-75g/km of CO2 will pay the same tax they did in 2021, ranging from zero to £25. There are different rates for cars registered after April 2017.
Legislation will be introduced in Spring Finance Bill 2023 to amend the rates for cars, vans and motorcycles.
Following consultation in 2022, the government will reform the HGV levy from August 2023 following the end of the current levy suspension period.
The reforms to the HGV levy is a further step towards reflecting the environmental performance of the vehicle, focusing more on air quality emissions and levels of CO2 emissions.
For foreign-registered vehicles, the reforms also ensure that the levy is focused on road usage and that it is more clearly aligned with the government’s international obligations.
The reformed levy will be legislated for in Finance Bill 2023 and will take effect from 1 August 2023 following the end of the suspension period for the existing levy in August 2020.
In addition, around £8.8bn is being set aside for a second round of City Region Sustainable Transport Settlements. This will help to develop mass transit networks and sustainable transport options across England’s city regions.
In this week’s Q&A, Croner-i experts explain the April increases to national minimum wage rates and how to avoid breaching the rules
My client has approached me about the increases to national minimum and living wage (NMW/NLW) from April. They are worried about breaching the rules, as paying a fine will be more costly than ever. I would like to reassure them and explain common breaches of NMW/NLW, so they know what to avoid.
From 1 April 2023, the following increases to NMW/NLW will come into force:
|National living wage||Rate from April 2023||Rate from April 2022||Increase %|
|23 years old plus||£10.42||£9.50||9.7|
|21-22 year old rate||£10.18||£9.18||10.9|
|18-20 year old rate||£7.49||£6.83||9.7|
|16-17 year old rate||£5.28||£4.81||9.7|
The increases apply in the next ‘pay reference period’ after the increase. For example, if X gets paid on the 15th of the month, the old rate applies until the 15th, and the new one from the 16th. To avoid misunderstandings, your client might want to explain this to their staff.
Falling foul of the law
The consequences of failing to pay NMW/NLW can be costly:
- fines at 200% of arrears (reduced to 100% if paid within 14 days, subject to a maximum of £20,000 per unpaid worker);
- repayment of arrears, calculated at the current rate of NMW/NLW;
- criminal proceedings for the most serious breaches.
Keeping up with entitlement
16% of those publicly ‘named and shamed’ by the government for breaching the NMW/NLW blamed failing to increase pay in line with entitlement. Your client should therefore be careful keep on top of employee birthdays.
If your client employs apprentices, that rate is only paid in the first year; thereafter, only to those under 19. Your client should therefore be aware of when they:
- move into year two (if 19 and over);
- turn 19 (after year one); and
- finish their apprenticeship.
These events mean they must be paid the appropriate NMW/NLW rate from the next ‘pay period’.
Certain deductions can cause pay to fall below NMW/NLW, and not breach the law, such as income tax and National Insurance; recovery of accidental overpayment or pay advances; pension contributions; student loan repayments; trade union fees; and accommodation offsets.
However, other deductions and expenses can be unlawful and lead to an underpayment of NLW/NMW. These include deductions for:
- travel costs (except commuting costs); and
- training courses.
For example, where an employee must purchase a uniform, their total pay minus the uniform cost cannot be below the applicable NLW/NMW rate.
Where travelling is essential to the job, eg, delivery drivers / travelling salespeople / domiciliary carers, they should be paid to travel between clients. Time spent travelling from home to their starting point (their commute) need not always be.
This depends on whether the trial is to test ability or provide value. Working a normal shift where they are not observed or given guidance is likely to attract the need to pay NMW/NLW.
- chef prepares dishes under observation – likely a genuine trial, no pay entitlement;
- chef works a kitchen service and is left to work alone – likely providing value and not a genuine trial, NMW/NLW due.
Please also note other changes from April:
- family friendly statutory payments increase from £156.66 to £172.48 on 2nd April 2023;
- statutory sick pay (SSP) increases from £99.35 to £109.40 on 6 April 2023.
Subscribers to the Croner-i VIP Tax Team service have access to our consultancy team who can provide a written report involving a full briefing of the scenario involved.
Remember, members of our VIP Tax Team service can call our priority advice line for instant help with tax, VAT and employment queries such as this.
The Department for Work and Pensions (DWP) is supporting proposals to expand automatic pension enrolment to under 22s and low earners
A private members bill from MP Jonathan Gullis called for two extensions to automatic enrolment, abolishing the lower earnings limit for contributions and reducing the age for automatic enrolment from 22 to 18 years old.
The lower earnings limit would also be removed, meaning those with low earnings would start paying into their pension as soon as they start earning.
Under the current rules, employers have to pay pensions contributions once an employee has earned over £6,240 and up to £50,270 in a financial year. Anyone who does not want to join a pension scheme can opt out.
There are no details about when the automatic enrolment changes are likely to be introduced.
Jonathan Gullis, MP for Stoke-on-Trent, said: ‘Auto-enrolment of pensions will benefit scores of young people in all four corners of the country, which is why I am delighted that Laura Trott [minister] is supportive of the bill.
‘With all the evidence of the huge positive impact it can have, it is a no-brainer that we now need to extend auto-enrolment to those aged 18 and above.’
The proposals come following DWP research, which showed that 12.5 million people were not saving enough for retirement.
Laura Trott, minister for pensions, said: ‘We know that these widely supported measures will make a meaningful difference to people’s pension saving over the years ahead.
‘Doing this will see the government deliver on our commitment to help grow the economy and support the hard-working people of this country, particularly groups such as women, young people and lower earners who have historically found it harder to save for retirement.’
The expansion of automatic enrolment was proposed back in 2017 in a government review, but no action had been taken since then to implement those proposals.
Employees across the UK saved £114.6bn into their pensions under automatic enrolment, an increase of £32.9bn compared to 2012, when it was introduced.
The department will also continue its work by introducing products such as pensions dashboards, although this scheme was put on the backburner last week due to IT programming complexities. It is now unlikely to be launched before 2025. Pension providers were due to start uploading data to the system this September.
It is also offering mid-life MOTs to provide advice to people about how they can save for their retirement and also to encourage 50-plus year olds to return to the workplace.
Around 38% of working-aged adults (12.5m) are not putting enough money aside for their retirement.
The DWP noted that this figure was a ‘relatively large proportion’ of the UK, adding that the level of under-saving increased to 14.1m (43%) of people when the majority of an individual’s defined contribution (DC) pension is converted into an annuity.
Higher earners are more likely to be under saving relative to target replacement rates (TRR), with around 14% of those in the lowest earning band (less than £14,500) under saving compared to 55% in the top earnings band – more than £61,500 per year.
It also looked at the pensions and lifetime savings association’s (PLSA) moderate retirement living standard, which suggested a greater 51% of working people could be under-saving.
Retirees will also have to wait until they are 57 years old to claim their private pensions following a ruling that will the minimum pension age rise from 2028.
Currently, the minimum pension age is 55, although this will be increased to 57 years in 2028, meaning it will be significantly harder to retire early.
After 2028, the government plans to keep the minimum pension age around 10 years earlier than the state pension age. This would mean the minimum pension age could rise again to 58 by 2034.
Taxpayers will now have an extra four months until the end of July to make additional payments to their National Insurance contributions to increase state pension entitlements
The government has extended the voluntary National Insurance deadline by four months to 31 July 2023 to give taxpayers more time to fill gaps in their National Insurance record and help increase the amount they receive in state pension. They will also be able to top up their accounts at the lower 2022-23 tax year rates.
This comes after members of the public voiced concern over the previous deadline of 5 April 2023.
The deadline extension was announced in writing earlier today and HMRC is urging taxpayers to ensure they do not miss out.
The minister’s written statement confirmed the move after a surge in demand for the top-up service. ‘HMRC and DWP have experienced a recent surge in customer contact. To ensure customers do not miss out, the government intends to extend the 5 April deadline to pay voluntary NICs to 31 July this year,’ said Victoria Atkins, financial secretary to the Treasury.
‘This applies to years that would otherwise have been out of time to pay after 5 April, up to and including the 2016/17 tax year. All voluntary NICs payments will be accepted at the existing 2022/23 rates until the 31 July.
We’ve listened to concerned members of the public and have acted.
‘We recognise how important state pensions are for retired individuals, which is why we are giving people more time to fill any gaps in their National Insurance record to help bolster their entitlement.’
Anyone with gaps in their National Insurance record from April 2006 onwards now has more time to decide whether to fill the gaps to boost their new state pension.
Paul Falvey, tax partner at BDO said: ‘It’s excellent news that the government is extending the time available for people to decide whether to fill in any gaps in their National Insurance record.
‘Making voluntary contributions won’t always increase your state pension entitlement, but for those who are eligible, a modest outlay to top up incomplete or full years missing from your record may mean a significant boost to your state pension.’
As part of transitional arrangements to the new state pension, taxpayers have been able to make voluntary contributions to any incomplete years in their National Insurance record which fell between April 2006 and April 2016, to help increase the amount they receive when they retire.
Eligible taxpayers can find out how to check their National Insurance record, obtain a state pension forecast, decide if making a voluntary National Insurance contribution is worthwhile for them and their pension, and how to make a payment on gov.uk.
Taxpayers can check their National Insurance record, via the HMRC app or their Personal Tax Account.
With less than a month to go before the end of the tax year, there are some essential tax saving measures that people can take before the tax year ends on 5 April
Paul Falvey, tax partner at BDO said: ‘This is the perfect time of year to review your finances and make sure you’re not missing out on any available tax reliefs – particularly as some of these reliefs become less generous from 6 April.
‘The tax system is complicated but there are some simple steps that anyone can take to make sure they are benefitting from available tax reliefs before the year end. However, for more complicated arrangements, it’s always a good idea to seek professional advice.’
1. Take advantage of tax-free pension contributions
The standard amount that an individual can set aside tax-free each year for a pension is £40,000 – and any unused relief in the prior three tax years can be brought forward. There is also a lifetime limit of £1,073,100 which is frozen until the 2025/26 tax year.
Taxpayers close to the limit should take advice on contribution levels, as exceeding the available allowance will mean a tax charge will arise.
Qualifying taxpayers who don’t receive full tax relief at source should disclose their contributions in their annual tax return to receive a rebate at their marginal rate.
2. Boost your state pension by filling gaps in your National Insurance record
You can usually pay voluntary National Insurance contributions for the past six years to fill gaps in your National Insurance record to boost your qualifying years that are used to calculate your state pension entitlement. The deadline is 5 April each year.
However, because of changes to the state pension system introduced in 2016, ‘transitional arrangements’ are in place which enable men born after 5 April 1951 or women born after 5 April 1953 to make up for gaps between tax years April 2006 and April 2016.
While the deadline to do this was meant to be 5 April 2023, this has now been extended to 31 July 2023, giving people extra time to decide whether to fill the gaps in their National Insurance record. After this time, you will only be able to pay voluntary contributions for the past six years.
Voluntary contributions will not always increase your state pension entitlement, but for those who are eligible – and depending on circumstances – a modest outlay could help top up your state pension payments. Visit www.gov.uk to find out more or seek advice from the Future Pension Centre (if you’re below state pension age) or the Pension Service (if you’ve reached state pension age).
3. Use your ISA allowances
UK residents aged 18+ can invest up to £20,000 each and parents can fund a junior ISA or child trust fund with up to £9,000 per child for 2022/23 – making a total of £58,000 for a family of four.
Children will automatically have access to the funds in their ISA when they reach age 18 but ISAs are a useful vehicle for building up funds to support them through higher education.
Investors who have not used up their full ISA allowance, should consider selling shares yielding dividends outside their ISA and buying them back within this tax-exempt wrapper, although care should be taken as this could trigger a capital gains tax charge.
4. Avoid the child benefit clawback
Child benefit is clawed back where annual taxable income (or the taxable income of a partner) exceeds £50,000.
If both partners can keep their annual taxable income below £50,000, child benefit will not be clawed back through the high income child benefit charge at a rate of 1% of the benefit for every £100 of income over £50,000.
Making personal pension contributions or exchanging salary in return for employer pension contributions can reduce your taxable income to keep it below the £50,000 threshold.
5. Use annual exemptions
Everyone can realise capital gains up to the annual exemption tax-free – £12,300 in 2022/23. The exemption is available to each individual, including minor children, but any exemption unused in a year cannot be carried forward.
Married couples and civil partners can transfer assets between them on a no gain/no loss basis and such transfers should be considered to ensure that the annual exemption can be fully used.
It is important to note that the annual exemption will be reduced from £12,300 to £6,000 from 6 April 2023 and further reduced to £3,000 from 6 April 2024.
6. Match capital gains and losses to reduce your tax bill
If you hold stocks and shares outside an ISA, selling them can trigger capital gains: where your total gains exceed the annual exemption (see above) you will pay tax on them.
If you also have investments standing at a loss, selling the asset allows you to set that loss against any gains that are taxable – either in 2022/23 or in later years (provided you claim it through your tax return). So matching gains and losses can cut your overall tax bill.
If you think the loss-making shares had long term potential, you cannot buy back them back immediately (a 30-day matching rule applies) but you can buy alternative shares in companies in the same sector, or buy them through your ISA or your spouse could invest in them.
7. Own a company? Consider paying yourself a dividend
It should generally be more tax-efficient overall to withdraw profits from your company by way of dividends rather than salary payments for 2022/23.
The position depends on a number of factors for company owner-managers but the balance will shift for some company owners when corporation tax rises from 1 April: in 2023/34 dividend payments will suffer more tax overall than salary payments if you are a higher or additional rate taxpayer.
Of course, there are other factors to consider as well: dividends are only possible if the company has sufficient ‘distributable reserves’ and may alter the value of the company’s shares up or down. Also dividends do not allow the recipient to pay tax-deductible pension contributions.
8. Entrepreneur? Consider SEIS/EIS/VCT investments
The Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) all offer tax benefits, but are really only suitable for experienced business owners and investors.
Under the SEIS, an individual can invest up to £100,000 (due to increase to £200,000 from 6 April 2023) in start-up enterprises in a tax year and claim income tax relief at 50% irrespective of his or her marginal rate of tax.
Investments in qualifying EIS companies (for example, certain companies listed on AIM or that are unlisted) attract income tax relief at 30% on a maximum annual investment of up to £1m for qualifying individuals.
Investments in VCTs provide income tax relief at 30% on qualifying investments of up to £200,000 and dividends received from the units are tax-free. In addition, the VCT can buy and sell investments without suffering capital gains tax (CGT) within the trust and there is no CGT payable on any gain made when you sell the VCT units.
9. Make gifts to use annual inheritance tax allowances
Reducing the value of the part of your estate that is above the nil rate band (£325,000) will reduce the inheritance tax (IHT) payable when you die.
Consider giving assets you do not need to other family members now. Gifts to a spouse or civil partner to enable them to use up their nil rate band are tax-free and gifts to other family members can also be tax-efficient over time.
Most lifetime gifts to individuals that are not covered by a lifetime exemption do not immediately trigger IHT and become totally exempt if you survive for seven years. Whilst the gift remains in your estate, the rate of IHT applied to it on death (40%) reduces each year depending on how many years you survive after making the gift.
You can give away up to £3,000 worth of gifts a year plus £250 to as many individuals as you like in a year and £5,000 to your children on their marriage.
10. Plan ahead for 2023-24
Plan ahead for 2023-24 by checking your tax codes. This can be done by logging into your personal tax account. Here you can inform HMRC about any changes that are likely to affect your tax code during the tax year. Helping HMRC to get it right from April onwards means you shouldn’t have any nasty surprises later.
Data from the 2021 census showed that the proportion of adults who have never married or been in a civil partnership has increased every decade from 26.3% in 1991 to 37.9% in 2021, while the proportion of adults who are married or in a civil partnership has fallen from 58.4% in 1991 to 46.9% in 2021.
What is important to realise is that there are a number of tax breaks available for married couples and civil partnerships when compared with cohabiting couples.
Higham said: ‘The total number of cohabiting couples has increased from around 1.5 million in 1996 to around 3.6 million in 2021, an increase of 144%. While they may not feel the need to formalise their relationship in law, such couples must recognise that they are foregoing significant tax benefits.
‘This is even more the case now than in recent years thanks to many tax allowances being either slashed or frozen, as announced in Jeremy Hunt’s Autumn Statement.
‘While marrying for purely financial motives is few people’s idea of romance, couples who are ambivalent or indifferent on the subject of marriage or civil partnership could quite sensibly be swayed by the fiscal advantages.’
Optimising tax allowances
Married couples and civil partners can transfer assets such as cash and investments between them, without giving rise to any tax liabilities.
This creates numerous tax planning opportunities to maximise the use of two sets of tax allowances. For example, by making sure you both use your annual Individual Savings Accounts (ISA) allowance (worth up to £40,000 for a couple).
It is also possible for a couple to optimise the use of their personal savings allowances so that they minimise tax paid on interest earned.
As interest rates on savings accounts have increased rapidly over the last year, and the allowances have been frozen (basic rate taxpayers can earn up to £1,000 in interest tax-free, higher rate taxpayers £500 and additional rate payers get no allowance).
With more individuals falling into the additional rate tax band since the proposals to reduce the threshold to £125,140, this is more useful than ever for those who have built up cash savings.
Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these are about to be halved in April so that only £1,000 of dividends per person can be received tax-free. That halves again to just £500 in 2024.
They can also reduce or eliminate entirely potential tax on profits crystallised on the sale of assets through using two sets of annual capital gains tax (CGT) exemptions, which gains significance this year with the individual CGT allowance being halved in April from £12,300 to £6,000, and then again to £3,000 in 2024.
The key here is that married couples (and civil partners) can transfer assets between themselves – known as ‘inter-spousal transfers’ – without triggering a tax liability. This option is not available to unmarried couples, as movement of assets between co-habiting couples is a disposal for capital gains purposes and would negate the benefits of this exercise.
For example, as an individual selling an asset for a profit – such as shares or a second property – you can realise up to £6,000 in gains in the next tax year before a CGT charge becomes due.
CGT is currently 20% for those subject to the higher and additional tax rates on most assets, but 28% on residential property other than main residence.
However, married couples have the flexibility to transfer assets between themselves ahead of a disposal in order to utilise their combined CGT allowance of £12,000. Or indeed they could transfer all of the assets to whichever of them is expected to incur the lowest CGT charge.
Unmarried couples can pass on assets valued up to £325,000 tax-free upon death (the inheritance tax nil rate band), but anything above this is potentially subject to 40% inheritance tax (IHT).
It is important to note that the IHT bill will have to be settled before probate is granted and the surviving partner may not have the assets outside of the conjugal home to pay this tax liability. So, if a partner is left a share of their jointly owned house that far exceeds this value, they could end up having to sell it to pay the tax – something that is not needed at a time of bereavement.
Where there are children, the couple may benefit from the residence nil rate band (RNRB) of £175,000, which can mean that together with the £325,000 nil rate band an individual can pass assets up to £500,000 tax-free upon their death.
The RNRB is only available when the family home is passed to children or grandchildren on death and the allowance is restricted or eliminated if the deceased’s estate is worth over £2m.
However, a deceased spouse or civil partner can pass an estate of any worth to the surviving spouse without immediate tax consequences. Furthermore, any IHT nil rate band that is unused by the deceased can be passed on for the spouse for their use in the future – creating a potential nil rate band of £650,000 for the survivor.
Furthermore, the RNRB can also be passed between married spouses to enable them to potentially claim a further IHT exemption on the value of the family home, enabling married couples to pass on greater amounts of assets tax efficiently where there are children. This means that a married couple could potentially pass on an estate of up to £1m tax-free.
Marriage also has potential benefits when it comes to making gifts to your loved one during your lifetime. Where an individual makes a gift of capital or assets to another individual, over the value of their £3,000 annual gift allowance, during their lifetime, it may be classed as a potentially exempt transfer (PET) and, should death occur within seven years from the date of the gift, the beneficiary may be liable to IHT.
That could be a nasty surprise if they don’t have the resources to pay the tax. However, gifts between spouses or civil partners are not potentially exempt transfers – they are ignored for IHT purposes altogether. Also, a married couple can gift to others up to £6,000 per annum without the gifts being considered as a potentially exempt transfer.
As only very rarely are income and savings split equally between spouses, the government allows a surviving spouse to effectively inherit the ISA savings of their deceased partner and maintain their tax-efficient ISA status.
The surviving partner will receive an extra ISA allowance known as an additional permitted subscription. This is equal to the value of the deceased’s ISA holdings at the date of death and is in addition to the surviving person’s own annual ISA allowance. This is not permitted between any other individuals.
Unmarried and cohabiting partners are not automatically entitled to any of their partner’s property, financial assets, or belongings if they die intestate unless they can be shown to be jointly owned.
They do have the legal right to claim against their partner’s estate if they have been cohabiting for more than two years, but this could be protracted, stressful and expensive – particularly if there are blood relatives of the deceased with a strong claim under intestacy rules.
It is important to bear in mind that as this stage there are still no rights of unmarried or unregistered couples under the intestacy rules, regardless of how long they have been cohabiting.
Writing a will is in many ways the answer to this but that is something very few unmarried couples do: estimates show that while more than half of married couples make a will, among cohabiting partners it is just 26%.
A spouse has an automatic claim to most of their partner’s assets on death, and while this might not be a reason to get married it is another aspect of the financial security that marriage provides. A civil partnership is a legal relationship entered into by two people which is registered and provides couples with the same legal rights and duties that they would have in a lawful marriage.
Finally, the annual marriage allowance is available to couples where one partner is earning less than the tax-free personal allowance of £12,570 per annum and the higher earning partner has earnings between £12,570 and £50,270 (£43,662 in Scotland).
The marriage allowance enables those eligible to transfer £1,260 of the lower earner’s annual tax-free personal allowance to their spouse or civil partner, creating a tax saving of up to £252 a year.