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.