Married Couples and Civil Partners Tax Allowances

July 2020
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You may be eligible for a tax refund of up to £1,188 if you are married or a civil partner, both born on or after 6 April 1935, with one of you with taxable income of less than the personal income tax allowance of £12,500 and the other spouse/partner with taxable income above this but less than £50,000 (£43,430 in Scotland).

The marriage allowance was introduced in 2015 and allows the lower earner to transfer 10% of their personal income tax allowance to their spouse/civil partner, which increases the amount they can earn tax free. HMRC estimate that less than half of the 4 million couples, eligible for this tax break, have applied.(1)

Couples where the lower income partner has taxable  income over £12,500  which is made up of  taxable savings income of less than £5,000 a year, (in addition to  £1,000 of tax-free interest and £2,000 of tax-free dividends) may also benefit from transfer of the marriage allowance to the higher income partner. 

In the current year this is worth up to £250. It can be backdated for up to 4 years and could be worth a total of £1,188 if all 4 previous years and the current year are now claimed. Those eligible in 2016/17 have only until 5 April 2021 to claim for that year. If a spouse has died since 6 April 2016 and would have been eligible, a claim can also be made on their behalf.

To claim, visit www.gov.uk/marriage-allowance or call 0300 200 3300 HMRC’s helpline. The spouse/civil partner with the lower income needs to claim and will need their national insurance number, proof of identity and personal bank details if a repayment is to be made into a bank account. For future years, the higher earners tax code will be adjusted so that their take home pay will rise in line with increases in the tax-free allowance.

Over age 85?

Couples, where at least one is born before 6 April 1935, may be better off to claim Married Couples Allowance which is worth between £351 and £907.50 per year in 2020/21 for those who are eligible. An explanation of this and calculator can be found here: https://www.gov.uk › married-couples-allowance or telephone 0300 200 3300. 

Independent Taxation of Married Couples and Civil Partners

Married couples and civil partners are taxed separately from each other, each is responsible for filing their own tax return and paying any tax due. Earned income such as salary, self-employed profits and pension income is taxed individually on the person who earns the income. 

Ownership of investments, savings and assets which produce taxable income and gains determines who is taxed on any income or gains arising from them. Assets owned jointly are assumed to be owned 50/50 unless stated otherwise.

Married couples and civil partners can arrange the ownership of assets to reduce their tax bill. By fully using the allowances and reliefs available to each taxpayer, a couple may increase their net income and gains from their investments. 

Gifting Between Spouses

Married couples and civil partners enjoy exemption from both capital gains tax and inheritance tax when gifting assets to each other.  This means the ownership of assets can be changed with no immediate tax consequences, enabling the couple to minimise tax payable on income or capital gains made when selling or gifting an asset.  For this to be effective for tax purposes, the transfer of ownership must represent a genuine and unconditional gift from one to the other.

The annual exemption for capital gains is £12,300 per person per tax year. So for example, if a wife makes a gain on her shares in excess of this, she could gift some of the shares to her husband before they are sold, enabling him to also offset his £12,300 capital gains allowance, reducing tax on the gain made. 

When changing ownership of assets to save one form of tax it is important to consider the potential impacts on other taxes, allowances and eligibility for certain benefits.
 
Allowances on Bereavement 

Married couples and civil partners also inherit allowances from each other on death. Estates inherited by a spouse or civil partner are exempt from inheritance tax. The survivor may inherit any unused portion of the deceased’s inheritance tax nil rate band (up to £325,000 which can be gifted free of inheritance tax to others). For eligible homeowners, up to a further £175,000 of unused residence nil rate band, (so long as the estate is less than £2.7 million), is available to be offset against the survivor’s estate. This means that couples can potentially leave up to £1million on second death before inheritance tax is payable. 

When a spouse or civil partner dies the value of their Individual Savings Accounts (ISAs) creates an additional ISA savings allowance for their widow/ widower or civil partner.  This enables them to invest up to this amount in tax exempt ISAs, within 3 years from the date of death, on top of their own allowances. 

Cohabitants Miss Out

None of these benefits are available to co-habiting couples. 

Kay Ingram                                    
Director of Public Policy
July 2020

(1) 1.78 million couples claimed in the tax year 2018-19, HMRC June 2019

Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.

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