Marriage and your assets
The financial ‘risks’ of marriage / civil partnership (used interchangeably below) are outside the scope of this note, but it is important to keep in mind the fact that the UK does not have a concept of common law marriage and ‘mere’ co-habitees have very few rights against each other – regardless of the length of their relationship. Once married, however, it is prudent to assume that in the event of a divorce, the Courts will approach the division of assets between the parties on a 50/50 basis unless specific circumstances dictate otherwise. Consequently, it is important to explore your options to protect any pre-marital wealth well before marriage. Typically this means considering a pre-nuptial agreement.
Marriage and your Will
It is important to be aware that under English law marriage automatically revokes a Will, unless the Will is entered into ‘in contemplation’ of a marriage to a specific individual and provided this is explicitly set out on the face of the Will.
Unmarried co-habitation – tax implications
Income Tax
Co-habitation does not change a couple’s income tax position – each individual is taxed separately based on their own income and tax profile.
Capital Gains Tax (“CGT”)
When assets pass between unmarried co-habitees, the transfer will be treated as a disposal at market value by the transferor on which CGT may be payable if the asset being transferred is standing at a gain.
However, each co-habitee will be able to retain their own main residence to take advantage of principal private residence relief (which can mitigate CGT on the disposal of real estate). This assumes that the couple continue to use both properties as residences such that the relevant rules apply.
Inheritance Tax (“IHT”)
Transfers between co-habitees are no different from any other gift to a third party. Consequently there is a risk of an IHT charge if the donor does not survive for 7 years from the date of gift. There is also a risk of the gift with reservation rules causing the gifted asset to remain in the donor’s estate if the donor continues to benefit from the asset gifted. This is potentially a real trap – especially for long term co-habitees.
Stamp Duty Land Tax (“SDLT”)
Each individual in a co-habiting couple can purchase a residential property without the second purchase triggering the 3% SDLT surcharge for additional dwellings.
Marriage – tax implications
Income Tax
Marriage has very few income tax consequences because the UK operates a separate regime for spouses and civil partners. Marriage Allowance allows a spouse whose income is below the personal allowance to transfer 10% of his or her personal allowance to the other party but this is only available if the other spouse is taxed at the basic rate.
Where property which gives rise to income is held jointly by a couple they are generally treated as being entitled to the income in equal shares unless an election is made. In some instances it is in fact beneficial to transfer assets out of the higher earner’s name to take advantage of the lower rate of income tax of his/her spouse, but this may have other, adverse implications.
CGT
You do not normally have to pay CGT if you transfer assets to your spouse. This is because it is treated as having been made on a “no gain, no loss” basis. This means that married couples can transfer assets to each other prior to a sale to reduce their combined CGT liability.
However, married couples may only have one main residence between them for the purposes of principal private residence (PPR) relief. If each party has a property when they marry and both properties are used by the couple following the marriage, they must elect which is to be treated as the main residence going forward otherwise HMRC will determine which is the main residence based on the facts
IHT
Transfers between spouses generally qualify for spouse exemption (100% relief from IHT). However, spouse exemption is limited to just £325,000 where the transferor spouse is tax domiciled in the UK but the transferee is not tax domiciled in the UK (and has not elected to be treated as such). This is a real trap as the IHT rules catch gifts both during lifetime and on death – and the risk of a gift with reservation of benefit is significant.
SDLT
If a married couple already have a property, they will have to pay the additional 3% SDLT on the purchase of a second home.
Children
A child is taxed independently and it may therefore be possible to save tax by generating income or gains in their hands. However, income deriving from gifts from a parent to their child continue to be taxed on the parent until the child reaches age 18. Consequently it is preferable for gifts to children to come from their grandparents, for example.
Ordinarily gifts to anyone other than a spouse require the donor to survive for 7 years to fall out of the donor’s estate for IHT purposes. However, payments to children will generally not give rise to IHT if they are used for their education or maintenance.
Death of a spouse
When a person dies, IHT is payable at 40% over the available nil rate band (currently £325,000). However, transfers to a surviving spouse will attract a complete exemption (unless the deceased spouse is tax domiciled in the UK but the surviving spouse is not – see above) and the unused proportion of the nil rate band can be transferred to the survivor. A separate residence nil rate band may be available where the home is passing to children, subject to restrictions.
For CGT purposes, there is the usual “tax free uplift” on the base cost of assets passing on death (this uplifts the base cost for CGT purposes to the market value at date of death, without a corresponding tax charge). This can be particularly helpful if assets are standing at a significant gain.
Separation and divorce
Divorce settlements will often involve transfers of assets from one spouse or civil partner to the other and the timing of any such transfer should be carefully planned.
For CGT, if a disposal occurs during the tax year of separation (but before the Final Order), it is deemed to take place on the “no gain, no loss” basis i.e. the receiving party is deemed to have acquired the assets for the same price that their spouse/civil partner originally paid for it. If the disposal occurs after the end of the tax year of separation, the transfer will be treated as a disposal at market value and so the transferor could incur a CGT charge is the asset is standing at a gain These rules are due to become more lenient from 6 April 2023; “no gain, no loss” treatment will be extended to three years from the date of separation.
Special rules may apply to the family home to extend the availability of PPR where one party moves out of the matrimonial home depending on how and to whom it is transferred.
However, transfers between spouses or civil partners will continue to be exempt from IHT until Final Order. Transfers after this should still be exempt if they are made pursuant to a court order, on the basis that there is no gratuitous benefit intended, but otherwise will be subject to the usual gifting rules for third parties.
There is no charge to SDLT for a land transaction that takes place pursuant to a court order or agreement in contemplation of or in connection with the dissolution or annulment of a marriage or judicial separation.
Seeking advice
The tax implications arising on marriage and divorce can be significant and it is important to seek advice at every stage to ensure that your tax affairs are managed efficiently. For example, taxes on the transfer of assets on a marital breakdown will be materially impacted by the tax profiles of the individuals involved and the situs of the relevant assets.
It is also important to have a Will and to keep it under regular review, particularly if your personal circumstances change.
If you would like to discuss any of the issues raised, please do not hesitate to contact the author or your usual Payne Hicks Beach contact.
