The UK tax system offers a handful of advantages for married couples. But what if you and your partner aren’t married or in a civil partnership? Peter Webb, our Head of Tax Advisory, takes a look at some of the tax issues to consider.
The last census in 2021 registered around 3.6 million couples in the UK who aren’t married or in a civil partnership. And with marriage rates falling, and more couples choosing to co-habit without a legal partnership, it’s certainly worth thinking about how tax is managed differently for unmarried couples. So, if you aren’t married, or in a civil partnership, here are some of the key areas to consider when it comes to UK tax:
Unmarried couples are considered separate individuals for Income Tax purposes. Each of you will be taxed based on your individual income and won’t benefit from the tax advantages available to married couples and couples in a civil partnership, such as the Marriage Allowance – which could save a married couple or civil partners £252 in tax this year.
Capital Gains Tax
Married couples and civil partners can transfer assets between them without triggering Capital Gains Tax (CGT). But if you’re not married you might face CGT when shifting any assets between you and your partner. This is an increasingly important consideration; this year the annual CGT allowance was slashed from £12,300 to £6,000 and next year it will be halved to just £3,000.
Inheritance Tax (IHT) is usually charged when you pass away and leave your assets to your intended beneficiaries. Given IHT sits at a hefty 40% this is a very significant factor when tax planning. For married couples and civil partners generally any transfers of assets either in life or death are completely free of IHT. However, for other couples this isn’t the case.
How does IHT work?
When you die your Estate is generally responsible for paying IHT on anything above the allowance – which currently sits at £325,000. Whilst married couples and civil partners can generally leave an unlimited amount to each other without paying any IHT at all, other couples don’t have this benefit. Married couples and civil partners can also transfer any unused allowance and unused residence allowance to their spouse or civil partner, meaning that their joint Estate can be worth up to £1,000,000 before any IHT is due. Other couples simply can’t do this.
The UK tax rules of intestacy will apply for couples who aren’t married or in a civil partnership. So, if you live with your partner in the UK and one of you dies without a Will, the other won’t inherit anything automatically. The Estate will be distributed according to the rules of intestacy, which are as follows:
- To the children of the person who died, in equal shares.
- If there are no children, to the parents of the person who died, in equal shares.
- If there are no parents, to the siblings of the person who died, in equal shares.
- If there are no siblings, to the grandparents of the person who died, in equal shares.
- If there are no grandparents, to the aunts and uncles of the person who died, in equal shares.
- If there are no aunts and uncles, to the first cousins of the person who died, in equal shares.
If there are no relatives in any of these categories, the Estate passes to the Crown.
These rules mean your partner doesn’t have a right to anything! If you aren’t married or in a civil partnership and want your partner to benefit from your Estate, you must have a Will in place to detail your wishes.
Unlike married couples or civil partners pension benefits also might not automatically pass on if you’re unmarried. This can impact the financial security of your surviving partner, so do check your policy and make sure you have nominated them as your chosen beneficiary.
Likewise, it’s essential that you and your partner have up-to-date Wills in place. These will set out who will inherit your assets when you die. You should also consider drawing up a Power of Attorney, which will allow you choose the person who you want to make decisions on your behalf if you’re unable to do so.
Sadly, the same tax rules don’t apply to couples who haven’t married or become civil partners. If you are in this position it’s very important to seek professional financial advice to understand the tax implications in the UK and take steps to reduce any possible tax bills or unnecessary problems.