Everyone loves a proper romantic wedding, but it’s no secret that getting married can also make a lot of sense from a hard-nosed financial planning point of view.
Yet the fact is that marriage is falling out of fashion. The data tells a clear story: the Office for National Statistics’ (ONS) 2019 (pre-Covid) marriage bulletin shows marriage rates for opposite-sex couples in 2019 were at their lowest on record since 1862, while the number of opposite-sex marriages taking place that year was down 50% on numbers in 1972.
According to the latest (2021) Census from the ONS, the proportion of adults who have never married or been in a civil partnership has steadily increased over the past three decades, from 26% in 1991 to 47% by 2021.
The upshot is that the number of unmarried couples is on the rise. Dr James Tucker of the ONS commented on the 2019 findings: “This decline is a likely consequence of increasing numbers of men and women delaying marriage, or couples choosing to live together rather than marry, either as a precursor to marriage or as an alternative.”
So, what does this trend towards cohabitation rather than marriage mean for your finances as a couple, and where are you particularly likely to lose out by not tying the knot?
Tom Kimche, client adviser on Netwealth’s advisory team, observes that the most notable difference is the inheritance tax (IHT) advantage that married couples gain. “Not only does the surviving spouse inherit assets from their deceased husband or wife free of IHT at 40%, but they also inherit any tax-free unused nil rate band (NRB) allowance,” he says.
In contrast, unmarried partners do not have those benefits, so when one dies, assets inherited by the other above the £325,000 NRB value are potentially taxable at 40%.
Importantly, that includes property owned together as joint tenants. As Victoria Ross, a chartered financial planner at Progeny, points out: “The survivor may have the right to inherit the property, but there could be tax due on the estate, which, if he or she is not able to pay, could result in a forced sale.”
To put that into context, if an unmarried couple, Geoff and Caroline, jointly own a £1 million house and Geoff dies, leaving the house to Caroline, tax of £270,000 (£675,000 x 40%, after Geoff's nil rate band has been used) will be due on it.
If the couple had been married, Caroline could inherit any value of assets without IHT liability. She could also potentially pass the house on to their children on death free of IHT.
Being married also has implications if one partner dies without leaving a valid will. In that situation, the rules of intestacy kick in to determine how their wealth and belongings should be distributed.
Ross explains: “When partners were not married or in a civil partnership, there is no automatic right to inherit from each other under the intestacy rules, regardless of how long they were together or even if they had children together.”
In these circumstances, the rules dictate that the estate passes to blood relatives in order of priority, starting with any children, then parents, siblings, half-siblings and so on. If the surviving partner wants to challenge that outcome and make a claim on the estate, they may be able to do so within two years through a deed of variation, provided everyone who stands to benefit under the rules of intestacy agrees.
When couples are married, things are much simpler. “The surviving spouse will inherit all personal belongings, the first £322,000 of the estate and half the remaining estate,” explains Ross. If the deceased partner had children, they will receive the other half. If they died without leaving children, everything goes to the survivor.
It’s therefore very important for unmarried couples to keep on top of their wills, so that their estates are distributed in line with their wishes.
In addition, unmarried higher-net worth couples need to consider their vulnerability to inheritance tax and its implications for their estate. For those estates worth less than £325,000 (not including their pensions), this is not an issue.
Income tax and capital gains tax
Married couples, unlike unmarried couples, can also transfer assets to each other without ‘realising’ capital gains (and therefore potentially being liable to capital gains tax, CGT, on any profits).
Let’s take a civilly partnered couple, Carmen and Rachel: this benefit means Carmen can transfer assets to Rachel, which can then be sold in her name.
In practice this can be set against Rachel’s £6,000 CGT exemption, which might otherwise have been unused that year and therefore lost. Alternatively, if Rachel pays tax at a lower rate than Carmen, the transfer would be a way of reducing the CGT bill on the sale.
Additionally, married couples can take advantage of the marriage/civil partners transferable allowance, which enables the lower earner to transfer 10% (£1,260) of their £12,570 personal allowance to their spouse. Couples where the lower earner is earning less than the personal allowance stand to benefit.
Kimche adds: “This can provide a reduction in the spouse’s tax bill of up to £252 a year and can be backdated for four previous tax years, amounting to £1,256 in total.”
Unmarried couples would have to pay CGT on any transfers between them, so these options are not viable.
However, it’s worth noting that unmarried partners who own a home each can both take advantage of the principal private residence (PPR) relief, which means no capital gains tax is payable on the sale of their property.
“In contrast, married couples and civil partners can only count one property as their main home at any one time, and are therefore only eligible for one claim of tax relief,” Ross explains.
She sums up: “In the main, when it comes to tax, married couples tend to benefit from more reliefs than unmarried couples, particularly high-net-worth couples looking to transfer assets between them to take advantage of unused tax bands.”
The exception is the PPR situation above: “If both partners own properties, and there is a likelihood of selling one, this could potentially be done more efficiently outside marriage.”
Pensions and life insurance
Whereas the surviving partner of a married couple has an automatic right to benefit from the other’s pension or insurance policy on death, for unmarried couples the survivor must be formally named as a “nominated beneficiary”. It’s therefore crucial that couples who are not married ensure they fill in the necessary forms to nominate their partner as beneficiary.
Moreover, warns Ross, definitions of “spouse or qualifying dependent” in defined benefit/final salary pensions can vary and may not necessarily even include a cohabiting partner.
Financially linked couples
There are certain tax-efficient steps that unmarried but committed couples whose finances are linked (through a jointly owned property, for example) can take, which would not be appropriate for more casual couples who keep their finances separate.
The central idea is that where one partner earns much more than the other, the high earner can fund the lower earner’s tax-efficient investment opportunities such as individual savings accounts (ISA). As Kimche says: “You don’t need to be married to do this, but you certainly need to be long-term committed!”
He gives an example of how this might work: “If one person is earning £300,000 and the other £50,000, it is unlikely that the lower earner will be able to maximise their pension contribution (£50,000 gross in this case). The higher earner can often gift surplus income to their partner to enable them to invest very tax-efficiently.”
Of course, tax efficiency and greater financial security alone are not sufficient reasons to get wed, but the bottom line is that married couples have more opportunities to reduce their joint tax bill; and it can make a big difference when one partner dies.
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