New romance? How to protect and build your wealth together

With romance in the air, we take a look at what a new relationship means for your finances.

Nobody can guarantee that couples who plan together will stay together, but those that take the time to discuss their finances and work together are more likely to be better off.

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If you’re settling into a new relationship – or even if you’re years down the line – there are plenty of ways you can join forces to build your wealth as a couple.

Capital gains tax

Following swingeing cuts to the CGT allowance, many more people will start needing to think about tax on capital gains. From April this year, the annual exempt amount will be cut from £12,300 to £6,000, before it’s cut again to £3,000 in April 2024.

Investments held in ISAs and pensions are sheltered from CGT. However, if you sell or dispose of other assets, any gains in excess of the allowance will be taxed at 20% for higher-rate taxpayers or 10% if you pay basic-rate tax (and your gains don’t push you into the higher-rate bracket).

For gains on property, the rate rises to 28% or 18% (for higher and basic-rate taxpayers respectively), but your main home isn’t included.

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But by teaming up, there’s plenty that couples can collectively do to reduce the amount of CGT that they pay.

• Use both sets of ISA allowances: each year you can shelter £20,000 from tax in an ISA. That means couples can protect £40,000 between them. Just bear in mind that you can’t have joint accounts, so each individual will have ownership and control over their own ISA.
• Combine your CGT allowance: couples can also effectively double gains they can make tax free by using both their annual exempt amounts. This can be done by transferring assets between each other. However, only married couples and civil partners can transfer assets tax free, which means if you aren’t married you could potentially trigger a tax liability if your gains exceed the annual exempt amount.
• Consider transferring assets to your partner if they pay a lower rate of tax than you: if you’re a higher-rate taxpayer facing a CGT bill, you could potentially reduce it by transferring assets to your partner if they pay less tax. Again, transfers are only tax free if you’re married or civil partners, so unmarried couples need to be mindful that they don’t trigger a tax bill.

Those entering into a relationship with their own property also need to be careful – moving home could affect your ‘Principal Private Residence’, meaning CGT may be payable on the other property when it’s sold.

Estate planning and inheritance tax

Once you’re settled into a new relationship, it’s important that your will is up to date and accurately reflects how you’d want your wealth to be distributed when you die.

If you aren’t married to your partner, and don’t have a will, you need to be aware that your estate would be allocated to family according to the rules of intestacy. Your partner wouldn’t get a thing.

Marriage usually revokes any previous wills, so it’s also essential to update your will quickly if you marry or remarry. You may well be happy for your new spouse to benefit from your will, but if you have children from a previous relationship, you’ll likely want to protect some of your wealth for them.

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The reality is that, without proper planning, your wealth could end up with your stepchildren, not your own after you and your spouse have died.

On the plus side, getting married means you can pass wealth to your spouse without owing inheritance tax and you can pass assets between you without triggering a capital gains tax liability. Married couples can also transfer their unused tax-free nil-rate band and residence nil-rate band to their spouse when they die.

It’s a complicated area and it’s important to seek advice from a solicitor specialising in wills. Options they can discuss with you include life interest trusts. A life interest trust that’s written into your will entitles your spouse to an income from an asset, or the right to stay in your home, until they die, but ultimately safeguards the capital or property for your children.

Pensions

Pensions are arguably the most tax-effective way to invest for the future. Tax relief on contributions boosts the value of your pot and your money is sheltered from tax as it grows. Since April 2015’s pension reforms, money held in a pension can also be passed on free of IHT.

Once again, there’s the opportunity for couples to work together to boost their retirement savings.

Even if one partner doesn’t work or pay tax, it’s still possible for them to pay into a pension, or have the other pay into one on their behalf.

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Each year non-taxpayers can contribute up to £2,880 into a pension, which is boosted to £3,600 by basic-rate tax relief.

Those who are lucky enough to be able to pay more than the annual allowance into their pension (100% of earnings up to a maximum of £40,000) can also pay into their partner or spouse’s pension.

Protecting your wealth

Planning your finances with a new partner can be – in its own way – romantic. It’s about planning your future and joint goals.

Putting in place plans to protect your wealth if things don’t work out, is less so and a much trickier subject to broach. However, it can be just as important.

So if you are doing anything such as transferring assets to a partner, it’s important to be aware that it’s not just a case of temporarily parking it with your other half, you will be handing over legal ownership of that asset.

Alternatively, if you’re getting married and have a lot of wealth that you accrued prior to the relationship, you may also want to protect that.

In a divorce – this money, including any inheritance you’ve received – may be considered a non-matrimonial asset and therefore excluded from the settlement. The catch though, is that only remains the case if there’s enough money to meet the needs of both spouses.

• 10 things to know about preparing for divorce in England and Wales

For more thorough protection, it may make sense to use a pre-nuptial agreement that lays out how assets would be split in the event of a divorce. Although pre-nups aren’t legally binding, they’re normally effective if both parties enter into them willingly and one party isn’t left in financial difficulty as a result.

If you’re already married, and your financial circumstances have changed – for example you’ve been left an inheritance – it is also possible to protect it with a post-nuptial agreement. But again, both parties need to agree.

Anything else to know when you start a new relationship or remarry?

• If you’re divorced, any maintenance payments you receive may stop if you remarry. Alternatively, if you only move in with a new partner, your ex might request a reduction to payments on the grounds that your living costs are lower.
• If you’re a widow or widower and receiving benefits from a spouse’s workplace pension, those payments may stop if you remarry – check your scheme’s terms and conditions.
• You may lose certain means-tested benefits when you move in with a new partner. That’s because eligibility is often based on your household income.
• It’s also a good idea to discuss your financial priorities with a new partner – how much financial support do you each want to be able to give children, for example. Views often differ, but if you discuss what’s important to you early on, you’ll be better placed to reach an agreement that works for both of you.