As we live longer a growing number of older people are making fresh starts in life in their 60s and beyond and rediscovering companionship and love.
There are a number of key financial planning issues for older couples getting together to consider to ensure they benefit from all the available tax breaks and protect themselves from unforeseen risks.
Later life romance financial challenges
Older people often bring different levels of wealth to a relationship and may also be very different ages. Both partners may want to keep their estates separate to prevent any children from previous marriages feeling they are being cheated out of some of their inheritance or having to wait for a new and possibly much younger partner to die before they inherit anything.
If they are moving into one home, whether married or not, the couple should at least make sure that any surviving partner still has access to the home on the death of the first and that they have enough to live on. Consideration should be given to the cost of potential nursing home fees in assessing this.
A legal agreement on this will prevent any risk of children not waiting to claim their inheritance and making the partner effectively homeless. In some situations this could end up being quite complex, involving pre-nuptial or post-nuptial agreements, wills and trust structures.
While considering this, couples should also review powers of attorney – deciding whom to entrust with authority to make decisions on their behalf if either loses their mental capacity. It is always wiser to put these in place before you need them.
To marry or not to marry?
A big question many people ask is whether they should marry or not. The considerations may go beyond romance.
First, it is important to dispel the myth of the “common-law” marriage. This is not recognised in law. To enjoy the tax and legal benefits of marriage you have to be in a proper marriage or civil partnership. “We lived together for years and were as good as married,” counts for nothing in the eyes of the law.
There are some risks to remarrying. If you are a widow enjoying a widow’s pension, remarrying may bring an end to that pension. One of my clients was married to a GP and would lose a substantial widow’s pension if she were to remarry, so it is important to check out the terms of any pension arrangements.
Equally there may be a widow’s or widower’s pension available to a husband or wife that would not be available to an unmarried partner.
From a tax perspective, though, there are a number of advantages to tying the knot – and not just to the couple themselves.
We all have a nil rate band – in lay terms, an inheritance tax (IHT) exemption – of £325,000.
There is no IHT on the first death where assets pass between a married couple. Compare this to an unmarried couple where IHT is potentially payable on assets in excess of the £325,000 nil rate band. And for married couples the nil rate band is effectively £650,000 as when one spouse dies their allowance also passes to the remaining partner, assuming that it remains unused.
Since April 5th 2017 individuals have also been able to claim the Residence Nil Rate Band (RNRB) an additional allowance of £125,000 in respect of their home. The new tax allowance, which is subject to tapering for larger estates, will rise to £175,000 by 2020/21 – meaning a married couple can eventually expect to pass on £1m tax-free to any children who might inherit their estate. This might save any children a substantial amount in inheritance tax.
Another benefit for married couples is the ability to pass assets between spouses without triggering a charge to capital gains tax (CGT). With careful planning this might enable them to enjoy a much greater level of tax-free income.
We each have a basic tax-free personal allowance, currently £11,850 a year per person. There is also a dividend allowance and a savings allowance. Couples may be able to share their assets so that any income is divided more equally between them, enabling them to make full use of both partner’s allowances.
Married couples also have a marriage allowancethat allows one partner (husband, wife or civil partner) to pass £1,190 of their allowance to the other. This is useful if one partner’s taxable income is below the £11,850 threshold and the other’s is above – it could reduce your tax by up to £238 a year.
Pooling assets can also enable couples to make use of capital gains tax allowances and ISA allowances too.
What this all demonstrates is that bringing together two households in later life can be very complex and anyone in this position is strongly advised to see a financial adviser and a solicitor to help ensure they don’t make any costly mistakes. They’ll obviously also remind clients that their circumstances can change and tax treatments too – so regular reviews are highly advisable.
Revised on 5 Feb 2019
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