Expert issues tax warning to unmarried couples living together

Unmarried couples living together, whether they plan to marry or not, face a starkly different tax landscape compared to those who are wed, experts caution.

The Office for National Statistics has reported that marriage rates bounced back to pre-pandemic figures in 2022, alongside recording "highest levels of cohabitation prior to an opposite-sex marriage" with nine in ten couples sharing a home before getting married, and the numbers are even higher for same-sex couples.

This trend suggests a significant number of people might be unaware of the tax consequences of cohabiting without a marriage certificate. Ben Glassman, Financial Planning Partner at Evelyn Partners, one of the UK's top wealth management firms, pointed out that cohabiting partners often have "often fewer rights and benefits conferred than they might think".

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Moreover, Glassman highlighted that by marrying or entering into civil partnerships, couples could benefit significantly from understanding and utilising the tax perks available to them, , reports the Liverpool Echo.

Moving assets

When it comes to asset management, being in a legally recognised union like marriage or a civil partnership can be financially advantageous. It allows for the transfer of assets such as money, investments, and property between partners without incurring tax due to inter-spousal transfer rules, reports the Express.

Also, married pairs or civil partners can merge their tax allowances, doubling the privileges effectively. By contrast, live-in couples, despite their lengthy relationships, miss out on the perks and tax planning options enjoyed by wedded duos or civil partners.

Therefore, they could face obligations for capital gains and inheritance taxes.

Ben clarified: "If a higher-rate taxpayer owns a buy-to-let property, they would pay income tax of 40% on the rental income. If their husband, wife or civil partner is a non-taxpayer, it could make sense for them to transfer the property, as their partner can use their basic personal allowance of £12,570. If the rental income is less than this allowance, it will be free from income tax, and if more than, then only basic rate tax will be paid."

On savings

Married couples and civil partners jointly have an ISA allowance of up to £40,000, free from both inheritance and capital gains tax implications. This means they can efficiently utilise their personal savings allowances to lower the amount of tax due on any interest gained.

Currently, standard-rate taxpayers can earn interest of £1,000 free from taxation, while those on a higher rate can earn £500, and additional-rate taxpayers do not receive such an allowance.

Ben elaborated on the benefits for married couples, stating: "Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these have been halved so that only £1,000 of dividends per person can be received tax-free. That halves again to just £500 from 6th April for the new tax year."

Marriage Allowance

He then pointed out the advantages of the Marriage Allowance: "Finally, the annual Marriage Allowance is available to couples where one partner is earning less than the tax-free Personal Allowance of £12,570 per annum and the higher earning partner has earnings between £12,570 and £50,270 (£43,662 in Scotland)."

Ben added: "The Marriage Allowance enables those eligible to transfer £1,260 of the lower earner's annual tax-free Personal Allowance to their spouse or civil partner, creating a tax saving of up to £252 a year."

Inheritance tax

Regarding inheritance tax implications for unmarried couples, Ben explained: "For unmarried couples, the maximum amount that can be passed on tax-free using the nil rate band is £325,000, or £500,000 with the residence nil rate band if they leave their main home to their children or grandchildren."

Conversely, he highlighted the significant advantage for married couples: "On the flip side, married couples have the perk of being able to pass on everything to their spouse completely tax-free. When the second partner passes away, they can potentially combine any unused allowance from their late spouse to double up to £1million tax-free, steering clear of the hefty 40% inheritance tax."

Unmarried partners who live together could face legal issues if one dies, as there's no automatic right to inherit without joint ownership or having lived together for more than two years. Ben suggests that cohabiting couples should make a will, noting that only 26% have done so, to ensure their estate is handled according to their wishes after death.

Couples moving in together can consider a cohabitation agreement to protect their interests in case of separation or death. Ben advises: "This can help to make sure that you are treated fairly in the event of separation or death. If you decide to get married in the future, the cohabitation agreement can quite easily be turned into a prenuptial agreement."