From tax breaks to stronger legal protections, our Family Law specialist Vivienne Middleton shares some of the financial benefits of marriage.
Before we discuss these benefits, it’s important to clarify the differences in how the law treats married and cohabiting couples.
The Women and Equalities Committee report (2022-23), confirmed almost half (46%) of the population in England and Wales wrongly believed that couples who lived together form a “common law marriage” and therefore have the same legal rights and protections as a married couple. In reality, the idea of common law marriage is nothing more than a myth. Unlike the law for married couples, legislation for cohabiting partners is far less clear and can be more complex to navigate.
For couples who aren’t married, the law provides no tax incentives, little protection when it comes to dividing property and finances, and parental rights, if the relationship ends. Nor does it provide cohabitants with the same inheritance rights upon death as married couples enjoy
We always encourage couples to enter a cohabitation agreement before moving in together. These agreements can provide reassurance and certainty to help avoid potential legal disputes if the relationship were to break down. Read our recent blog on cohabitation agreements for more information.
One of the biggest financial advantages of marriage is the ability to transfer money and assets between spouses tax-free. In contrast, cohabiting couples may face tax liabilities when transferring assets.
By way of example, if cohabitees jointly own a property worth over £250,000 and decide to separate, if one partner wants to “buy out” the other’s interest, this may lead to a stamp duty land tax (SDLT) and capital gains tax (CGT) liability to pay. From 1 April 2025 the SDLT threshold will fall to £125,000 which means more people will have a tax liability to pay. These tax penalties are not payable by spouses.
Because savings can be moved freely between spouses, married couples can also minimise tax payments by transferring savings between them. For instance, imagine partner 1 is a higher-rate taxpayer, subject to a 40% tax rate, with savings that generate interest exceeding their personal savings allowance of £500 per year, and partner 2 has retired and no longer has sufficient income to be liable for tax. If they are in a long-term, trusting relationship, partner 1 can confidently transfer savings to partner 2, allowing them to take advantage of their tax-free annual allowance.
This principle applies not only when one partner is a non-taxpayer, but also in cases where either partner has not fully utilised their personal savings allowance. In such instances, transferring savings can help maximise your household’s overall tax efficiency.
In a similar vein, if you’re married or in a civil partnership, you can transfer assets to your spouse on death without having to pay any Inheritance Tax (IHT); this is known as the “spousal exemption”.
Crucially, you can also pass on your unused IHT allowance to your spouse after you die.
Simply put, no IHT is due on the first £325,000 of your estate. Beyond this, if you leave your main residence to your direct descendants, such as children or grandchildren, you typically receive an additional allowance of £175,000, bringing the total tax-free threshold to £500,000. If you leave everything to your spouse, your allowances remain unused and are passed on to them. This means that when your spouse passes away, they can combine their own allowance with yours, allowing up to £1 million to be passed on free of IHT.
By contrast, unmarried couples will face IHT at 40% on any assets above the nil rate band (currently £325,000), including their share of the property.
There are many reasons why you may not wish for your spouse to inherit some or all of your estate. Similarly, you may also want to protect your wealth in the event of a divorce.
Though currently not legally enforceable a prenuptial agreement (often referred to as a ‘prenup’) can help to safeguard any existing assets or funds you intend to pass on to someone else. For example, if you’re remarrying and want to ensure a portion of your wealth is ringfenced for children from a previous relationship, a prenup can set these assets aside.
Prenups have historically received a bad reputation as being a cold, legal formality, but the truth is they provide an opportunity for clarity for both partners, a chance for an open conversation about financial expectations. Whether it’s deciding how to handle personal assets and debts, protecting anticipated inheritance or agreeing on what should remain separate, a prenup can provide certainty and peace of mind for the future.
Finally, if you’re married or in a civil partnership and one of you earns less than £12,570, you could benefit from another tax benefit in the form of the Marriage Allowance. Introduced in 2015, the Marriage Allowance lets a lower earner transfer £1,260 of their Personal Allowance to their spouse, reducing their spouse’s tax by up to £252 in the tax year.
You can benefit from Marriage Allowance if all the following apply:
Lodders’ Family Law team is committed to putting our clients first. Personal service and taking responsibility are essential elements of our overall client care, together with offering a confidential and discreet service. To speak to one of our experienced family lawyers, please get in touch.
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