The Difference In Taxes For Married And Unmarried Couples

“For richer, for poorer, in sickness and health, until death do us part.” When citing these popular wedding vows the last thing the happy couple is likely to be considering is their new tax position. But just how advantageous is the tax position of being married or entering into a civil partnership?

Inheritance Tax (IHT)

Sadly, for cohabiting couples the tax system is wholly unsympathetic. Married couples and civil partners benefit enormously from an unlimited IHT exemption on transfers between them, whether on lifetime gifts or on death. The only exception is where the couple have a different residence status and the transfer is to the non-UK domiciled spouse or civil partner. In that case, the exemption is limited to £325,000.

Where the unlimited IHT exemption applies and the main asset is the family home, it means there’s no need for the survivor to sell it to pay the tax. That’s the main risk for unmarried cohabiting couples. However, a suitable life insurance policy that pays out a sum equivalent to the likely tax on the second death can offer a cost-effective solution, particularly if the couple are in good health.

Capital Gains Tax (CGT)

There are also significant CGT benefits for married couples and civil partners who make lifetime gifts to each other. The gift avoids an immediate CGT charge and instead the recipient takes over the spouse’s original acquisition cost. Transfers on death, however, are treated the same for all cohabiting couples whether or not they are married or in a civil partnership. The deceased’s historic gain is simply wiped out and the recipient can then sell the asset without a CGT charge.

One area where unmarried couples have a better tax treatment is CGT main residence relief. If they each own their own home (one of which may very well simply be a holiday home), they can continue to claim the exemption on both whereas married couples and civil partners can only claim one relief between them.

What are the main barriers to changing the taxation process for cohabiting couples? What are the benefits and risks?

Aside from the possibility of a change in the law opening up civil partnerships to heterosexual couples, there is little or no sign of a move towards offering tax benefits to cohabiting couples. Parliament’s attitude appears to be that there are existing options open to heterosexual and same-sex couples to recognise their relationship officially. If they choose not to use them then they cannot expect equivalent tax breaks.

This attitude is partly driven by an apparent belief that officially recognised relationships are more likely to endure, and that enduring relationships are a good thing to be encouraged by government. It is also likely to be a practical consideration as it is likely to be difficult to define which cohabiting couples should benefit from tax breaks in terms of the nature and length of their relationship?

How can we help?

When making a Will it is important to understand the difference tax positions and the exemptions available to you. We can discuss these matters with you at the initial meeting and advise you fully on the preparation of your Will.

If you need help making your Will please call our Specialist Team.