Cohabiting, marriage or civil partnership - which is better for tax?

Cohabiting, marriage or civil partnership - which is better for tax?

Are you cohabiting, married or in a civil partnership? The nature of your personal relationship can have a significant impact on the way your income is treated for tax purposes.

Although 'common law' relationships are becoming increasingly common, UK tax law currently discriminates against these sorts of arrangements. Married couples and people in civil partnerships are treated the same as each other but cohabiting couples are not.

This is in contrast to the rules around state benefits, where working tax credits, child credits and universal credits are calculated on your joint income, regardless of your marital status.

3 ways that tax law discriminates against cohabiting couples

There are three main areas of tax that discriminate against couples with a long-standing relationship who cohabit, but who aren't married or in a civil partnership.

  • Marriage Allowance - under the Marriage Allowance rules, one individual is allowed to transfer 10% of their personal allowance (currently 10% of £12,570) to their spouse or civil partner. The 'receiving' individual can save up to £252 in tax annually. This transfer of allowances is not available for couples who are 'just' cohabiting.
  • Capital Gains Tax - when it comes to Capital Gains Tax (CGT), assets such as shares can be transferred between spouses/civil partners on a 'no loss, no gain' basis. Effectively, the receiving partner is deemed to have acquired the asset at the same cost as the donating partner. This means that transfers of this kind won't give rise to an immediate capital gain. When these assets are eventually sold, because any gains are split, both individuals can use their tax-free allowance.
  • Inheritance Tax - the Inheritance Tax (IHT) rules allow an individual to bequeath unlimited assets on death to their spouse or civil partner without any Inheritance Tax being due. But this doesn't apply for couples that are cohabiting.

The potential benefits of cohabiting

As you can see, being in a married couple or civil partnership does have its tax perks. But are there any tax benefits for cohabiting couples to be aware of?

Here are two key benefits:

  • If property is owned jointly by a married couple, any income is generally deemed to be earned 50/50 by each individual - although they can have it taxed in proportion to actual ownership, if that's in a different ratio, by each of them completing a Form 17 document. Unmarried couples can split this property income in whatever ratio they wish, regardless of the actual ownership percentage.
  • Married couples can only elect a single property to be their main residence for CGT purposes. However, it's possible for unmarried couples to nominate different properties as their main residence.

Get in touch to arrange a finance health check

If you're planning any significant acquisitions or disposals of assets, please do come and talk to us first. Even something innocuous, like gifts between spouses, may be caught out by things like settlements legislation, so it's important to factor in your marital status.

An annual financial health check can be a useful opportunity to review the way you structure the ownership of joint assets between partners.