Money expert Martin Lewis has outlined how couples can save £200,000 in Inheritance Tax – by getting married.
While marriage is not as popular today as it used to be, tying the knot still carries some unbeatable tax perks which Money Saving Expert founder stresses is a deliberate bit of ‘social engineering’ to encourage couples to wed.
As well as perks around Income Tax transfer, sharing savings and other upsides to both marriage and marriage-equivalent civil partnerships, one of the biggest savings married couples can make is on Inheritance Tax.
Speaking on the latest episode of The Martin Lewis Money Show Live on ITV1 on February 13, Money Saving Expert founder Martin Lewis says people leaving money and property can ensure their relatives avoid £200,000 of Inheritance Tax – if they are married and leave it to their spouse.
Martin gave his viewers the example of a couple who have £1m in assets including a house, and were married.
Martin said: “He leaves everything to his wife, all the money goes across. Now because he has left everything to his wife, he has not used any of his inheritance tax allowances, therefore she gets the inheritance tax allowances that he had.
“So now, she can pass on £650,000 [£325,000 doubled] and another £350,000 [£175,000 property allowance, doubled] if they’ve got a primary residence, that’s £1m.”
The way this works is that usually, you can leave £325,000 tax-free to your loved ones. This increases to £500,000 if it includes a ‘primary residence’, ie the house you lived in.
But if you pass this £500,000 to your husband or wife, they ‘inherit’ your allowances. Then, when they die, if they leave it to your children, they can pass on both your allowance and their own allowance combined. That makes £1M you can pass on without paying any tax.
But this only works for married couples, not those who are just co-habiting.
Martin added: “Now let’s just imagine they did exactly the same thing but they weren’t married.
“In that same scenario, he’s left everything to his partner, so he’s used up his inheritance tax allowance, now if she leaves everything to the kids, she only has half of that, so that’s £500,000 – and gonna be paying tax on it.
“Well, you know what, depending on the amount you could be talking £200,000 of tax paid because they weren’t married.
“That is by far the biggest benefit of marriage for those who have assets.”
This is backed up by the government. Gov.uk explains: “Everyone has the same basic tax-free allowance before they must pay Inheritance Tax. The current threshold is £325,000. If the threshold has not been fully used when the first person in a marriage or civil partnership dies, you can transfer it. The unused part can go to the surviving spouse or civil partner.”
