It's Valentine’s Day and the romantics amongst us might be considering whether to celebrate this festival of love by going down on one knee.
However, with love clouding the mind, the last thing you might think about are the benefits, or otherwise, of marriage or civil partnership over co-habiting. It is worth temporarily clearing your head to give your finances some thought before making the final decision this Valentine’s Day.
[Presumably, David wouldn't recommend checking out your date's finances before you head to the restaurant later...]
Of course marriage and civil partnerships are about love and making a life-time commitment to someone, but before deciding to get married or entering into a civil partnership, it is worth mulling over the financial pros and cons, especially if you are very wealthy.
Broadly speaking, the financial benefits for marriages and civil partnerships are the same. The main initial benefit is the ability to move income and assets between spouses / civil partners. This is a very substantial benefit for business owners and the wealthy.
With people living much longer these days, it’s also nearly always the best option to get married if you have no income from trusts, particularly because of the benefits regarding inheritance tax and pensions.
However, before you ask the most important question of your life, don’t forget that there are financial benefits to continuing to co-habit with your loved one. So if you’re the one asking the question or being asked this Valentine’s Day, it is worth putting love aside for a moment to carefully think through what the best option for you both will be.
There is no denying love, but here are some practical aspects of marriage, civil partnership an co-habiting to think about when considering your future wealth.
Marriage and civil partnership: five financial benefits
1. No inheritance tax when a spouse dies: Spouses and civil partners can give each other property without any inheritance tax becoming payable on the value of those gifts, both for lifetime transfers and for gifts on death under a Will or the intestacy rules. If a husband dies and leaves everything to his wife, there will be no inheritance tax to pay no matter how high the value of his estate, unless the survivor is not domiciled in the UK for tax purposes.
2. Less inheritance tax when the surviving spouse dies: You can inherit your spouse or civil partner’s unused nil rate band. Married couples and civil partners currently have a combined nil rate band of £650,000. If a wife inherits all her husband’s estate when she dies her estate will only pay inheritance tax on any value above £650,000.
3. Reduced total tax on investments: Spouses and civil partners can pass assets (such as shares or rental property) between them free of capital gains tax and income tax. This is a tax-efficient way of equalising assets by putting them in the name of the spouse with the lowest tax rate. Business owners in particular can benefit from this by taking income from their company as dividends.
4. Higher basic state pension. A widow, widower or surviving civil partner can use their deceased partner’s National Insurance Contribution record if it will provide them with a higher basic state pension. They can also normally inherit part of any additional state pension.
5. Occupational pension benefits: A widow, widower or surviving civil partner can receive some pension from their deceased’s occupational pension benefits which is not always the case for people that co-habit.
Cohabitation: five financial benefits
1. Financial independence: Currently cohabitants don’t have a legal duty to support each other, either during or after the relationship, unlike married couples or civil partners. This makes it easier to remain financially independent, but it could be a big disadvantage if your partner is much wealthier than you and/or you sacrifice your career to bring up the family.
2. Keeping hold of the family silver: If you have family assets or heirlooms you want to keep in your own family like a property or a painting which has been passed down through the generations, it is far less likely to be lost to your ex-partner if you separate than if you had been married or in a civil partnership.
3. Retaining pension rights from a previous marriage: If you are a widow, widower or surviving civil partner (under state pension age) who has benefited from your deceased’s National Insurance Contribution record for state pension purposes, you would lose this benefit if you remarried or entered into a civil partnership.
4. Avoiding the loss of benefits from trusts: People entitled to interests under a trust can lose these if they remarry or form a civil partnership. A deceased spouse can, in their Will, give their widow or widower a life interest in all or part of their assets but this can terminate if the surviving spouse remarries.
5. Preventing the costs of a break-up: There are fewer formalities required to end a cohabiting relationship, meaning that the cost of breaking up can be much lower than the cost of a divorce or a dissolution of a civil partnership should the worst happen.
David Dale is head of wealth management at Dickinson Dees law firm