Does being married benefit from the advantages of inheritance tax?

07:45 am September 21, 2021

My husband and I have lived together for over 40 years. We are not married but have started to wonder if this might be a good idea as we understand that our children might pay less estate tax if we do. Will being married have other advantages from a financial point of view?

Matthew Beck is a Certified Financial Planner at Smith & Pinching
– Credit: Smith & Pinching

Matthew Beck of Smith & Pinching responds:

There are times when being married or in a PACS can give you a financial advantage depending on your situation. We would need to look at your individual and combined assets, income levels and family situation before we can say for sure.

Inheritance tax (IHT) rules certainly favor married couples and civil partners whose assets exceed the available exemptions. According to the rules, if one of the spouses or civil partners dies and leaves their entire estate to the surviving partner, there is no IHT to pay. Additionally, any unused IHT waivers can be passed on to the surviving spouse/partner and added to their own waivers upon death.

At current rates, a surviving spouse/civil partner could qualify for a potential combined IHT exemption – depending on their marital status – of up to £1m, while each cohabiting partner will only receive half of this and that each partner’s estate may have an IHT liability. However, under IHT rules, estates worth more than £2m will see a reduction of one element of their principal residence exemption, if it applies to their estate.

Additionally, if you transfer assets from one to the other during your lifetime, there could be IHT or capital gains tax implications. Transfers between spouses or civil partners are exempt in both cases.

It’s also worth checking your pensions. In some cases, pension benefits in the event of death after the death of the affiliate may only be payable to a spouse or civil partner.

If you have savings and ISA investments, there may be another advantage to being married. A spouse/civil partner can inherit a one-time additional ISA allowance equivalent to the value of the deceased partner’s ISA holdings, even if the ISAs themselves are left to someone else.

There could also be potential tax advantages to being married, if one of you is a basic rate taxpayer and the other a non-taxpayer. Marriage Allowance allows the non-taxpayer to transfer 10% of their personal allowance to the taxpayer at the base rate, meaning you pay less tax overall as a couple.

Planning will help ensure that you manage all of your tax obligations. I suggest you meet with an independent financial adviser to go over the numbers before either of you get down on your knees!

References to taxation are based on our understanding of current legislation and HMRC practice, both of which may change. The opinions expressed do not constitute advice.

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