Marry for the Tax Breaks?

Valentine’s Day no doubt brought a number of proposals of marriage – presumably none of these were to take advantage of the forthcoming “Transferrable Tax Allowance”, to be introduced from 6th April!

This new Allowance, will enable spouses and civil partners to transfer a fixed amount of their personal allowance to their spouse, and this option is not available to unmarried couples. This will be available for couples where neither pays tax at the higher rate. If eligible, one partner will be able to transfer 10% of their personal allowance to the other partner, and for the 2015 / 16 tax year, this will amount to £1,060.

There have been various headlines about a £1,000 tax break, although, in reality, this means that the partner will be taxed on £1,060 less of their income, giving an actual benefit of £212 (20% of £1,060).  Whether or not this is enough to make someone pop the question is presumably doubtful!

This new proposal is not to be confused with the Married Couples Allowance, which is for married pensioner couples, and can be worth in excess of £800 a year for eligible couples.

However, whilst perhaps even less romantic, there is a potentially much more financially beneficial tax allowance for married couples and civil partners, referred to as the “Transferrable Nil-Rate Band”.

Inheritance Tax is charged on the value of a person’s assets on death, but each individual currently has a tax free band, commonly referred to as the nil-rate band, presently amounting to £325,000.  This is deducted from the value of the estate and Inheritance Tax is charged on the balance, currently at a rate of 40%.

Where one spouse or civil partner dies before the other, and part or all of their nil-rate band is unused at that time, eg where all the assets of the first spouse or civil partner pass to the surviving spouse or civil partner, which would be exempt from any Inheritance Tax liability, then any unused nil-rate band may be carried forward and added to the nil-rate band of the survivor.

This is done by calculating the percentage of the nil-rate band that was unused. For example, if one spouse or civil partner died and left their whole estate to the survivor, then 100% of their nil-rate band would be unused, meaning that the survivor’s nil-rate band threshold would be increased by 100% – currently from £325,000 to £650,000.

Upon the death of the survivor, this “Transferrable Nil-Rate Band” would save an Inheritance Tax payment of £130,000.

Whilst I am sure no Valentine proposals were looking to capitalise on the “Transferrable Nil-Rate Band”, it is one allowance that should not be ignored. For further information, please contact our Private Client Department who would be happy to provide more information.

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