Right now in the UK and in much of the rest of the world, the squeeze is on. And by that we mean the cost of living squeeze. While some households are obviously more well off than others, it’s getting more difficult to maintain the same standard of living, regardless of what that standard actually is.
For our clients it’s not generally an issue of being able to continue to afford their lifestyle, but some are finding that it’s becoming increasingly difficult to maintain their savings rate.
And really, with inflation floating around double digits throughout the whole of 2022 and still at 9.2% at the time of writing, it’s not surprising at all. It's understandable that this would make some people a little anxious.
But there’s a component of this that doesn’t really get spoken about. And that’s the way that couples deal with money. The lack of communication around finances not only adds to this anxiety, but it also means that the way the money is being managed in that household is probably not living up to its potential.
Not only that, but if you’re a married couple, your money is a lot more intertwined than you probably think. So today we’re going to dispel some of the myths around couples finances, as well as giving you some strategy tips and best practices to make sure you’re both on the same page.
So, let’s talk about the difference between couples that look at money together, and those that keep their money separate. These days, it’s pretty common for couples to keep their finances separate. Even those who’ve been together for years and years and might even have a couple of children.
One of the most common ways we see this work is that there will be a joint account that’s used to pay for things like bills, groceries and maybe holidays, and the rest is done individually.
This means that both members of the couple are building up their own savings, adding to their own investments and putting in place their own strategy and financial plan. The problem with this strategy is that it means leaving a significant amount of money on the table.
Or more specifically, giving a significant amount of extra money to the government through higher tax. Over the course of a lifetime, we could be talking about hundreds of thousands of pounds here.
For those who are familiar with the tax system in different countries, there are often more clear ways to save tax when you’re married. In the US, for example, you can file your taxes individually or jointly.
In the UK, it’s not quite as obvious. Taxes are filed individually regardless of your marital status, and unless you go looking (or you’re a client of Rosecut!) it’s not that clear how you can benefit from joining up your finances.
Here are a couple of examples:
In the UK, taxes are levied on the individual based on their own income and capital gains. That means you could have Jeff Bezos as a husband, and you could technically still be a basic rate tax payer if your own personal income was low enough.
This works for capital gains tax (CGT) as well. Everyone has access to an annual tax free CGT allowance of £12,300, though this is reducing to £6,000 in for the 2023/24 tax year. This means that the first £6,000 of gains result in no tax.
On amounts above that, it’s a sliding scale depending on whether the person is a basic, higher or additional rate taxpayer.
What’s less well known is the fact that a husband and wife can transfer assets between themselves, without triggering a capital gain.
That means that you can legally transfer your assets or a percentage of an asset to your married spouse before you sell it. You then gain access to two rounds of allowances and reliefs.
Sure, with the CGT allowance going down to £6,000, this isn’t going to make a huge difference, but given that CGT for Basic Rate taxpayers is 10% (18% for property) and 20% (28% on property) for Higher and Additional Rate taxpayers, it could still cut down the amount you pay significantly.
And if you’re a founder or an entrepreneur, the potential benefits get much, much bigger. Business Asset Disposal Relief (BADR - previously known as Entrepreneurs Relief) is a lifetime allowance of £1 million when you sell a qualifying business.
For anything above this figure, a Higher or Additional Rate taxpayer will pay 20% capital gains tax. So on the next million, you’re looking at a tax bill of £200,000.
But, should you instead transfer shares in the company to your husband or wife, they could potentially gain access to their own BADR. If you sell the company for over £2 million, this alone could save £200,000 in tax.
Now to be totally clear, this is not advice. It’s a complex area and you need to ensure that it’s done properly and that both you and the business qualify for the relief, but it shows just how much you could be missing out on by keeping your finances totally separate.
This same concept applies to income tax. Any income you receive from assets you hold individually, will be fully assessed by HMRC on your tax rate. If you’re an Additional Rate Taxpayer and you receive £25,000 in dividends, you could be paying £9,444 income tax from next tax year when the allowance reduces.
If you have a spouse who’s a Basic Rate taxpayer, you could transfer the shares to their name and drop that figure down to £2,100. That’s over £7,000 a year. Put that into investments for 10 years with a 6% return, and it could be worth over £100,000.
Do it for 25 years and it could be worth over £500,000.
There are other minor benefits such as the Marriage Allowance, but the broad concept is that shifting income between spouses means you can maximise all of your allowances and pay the lowest level of tax possible.
If you’ve got a business you can get even more granular with the way you pay salaries and dividends between the two of you.
In the UK there are a couple of tax advantaged accounts that everyone should consider using. Individual Savings Accounts (ISAs) are one and pension funds are the other. Both of these offer significant tax benefits and tax free growth, which can add up to major money over a long period of time.
The thing is, a married couple can’t transfer their allowance to their spouse, but they can contribute into an account for them. So if one spouse is the sole income earner, they could maximise their own £20,000 tax free ISA allowance, and then also direct their income into an ISA in their partner's name.
Pension funding gets a lot more complex, but the same strategy can apply. Overall this can mean more of your assets end up in tax effective accounts, than if you both tried to fund them individually.
Yes, it’s not very romantic to talk about divorce in an article about couples finances. After all, we’re trying to show you the benefit of coming closer together! But it’s important, because it’s one of the main reasons why couples choose to keep their money separate.
Many believe that keeping assets in their own name means that they won’t be considered in any divorce settlement.
As any good family lawyer will tell you, that’s usually not the case.
During a divorce settlement, all the couple's assets are taken into account. This includes assets that were built up prior to marriage or without direct involvement with their spouse. Not only that, but prenuptial agreements hold very little value in the UK courts.
All that is to say, when you say ‘I do’ in the UK, the saying ‘what’s mine is yours’ becomes not only a romantic notion, but a legal one too.
So with that in mind, keeping finances separate offers effectively no benefits from a technical point of view, and means you’re potentially missing out on serious tax savings.
Hopefully now you can see why having a joined up approach to your household finance is super important. So below we’re going to briefly go over some options for managing your individual pots of money in the most effective way possible.
Keep in mind this is just an overview, and it’s not going to be right for everyone. Your circumstances may have specific requirements which throws all of this out the window, so it’s always important to speak to us to help work through your needs.
For regular expenses, it makes sense to have a joint bank account which covers these. From our experience, even couples who keep their finances totally separate will generally do this.
This account can be used for expenditure that you incur every week or month. Think things like groceries, utility bills, insurances, memberships and subscriptions.
This bank account could also be the account in which all income comes in. You could set it as the account which receives any salary or dividends you’re paid, as well as any withdrawals from any investments or income from assets like property.
Now while we do advocate joining finances, we also strongly believe that both members of a couple should be able to maintain a degree of independence. It’s important not to feel like every penny is being watched and tracked, and that you have some freedom in how you spend your money.
And besides, it’s a bit tricky to keep birthday presents a surprise if you only have joint accounts!
So for this, separate bank accounts are still a good idea. There are a number of different ways to make this work. One that can work well is to set a monthly ‘allowance’ that comes out of the joint account and is directed into the individual accounts automatically.
The final cash account we tend to suggest is another joint account which holds your emergency fund. This shouldn’t be a large amount, as excess cash is a bit of a waste of time. Around 3 - 6 months living costs is a good rule of thumb.
By having this jointly held, it means both of you know what sort of safety net you have in place.
This is where it can make sense to split your money up individually, but potentially from joint income. The idea is to maximise the efficiency of your overall situation. This means utilising both of your ISA allowances, even if one partner is the sole or main income earner.
Depending on your income, this can get complex.
The point is though, you should consider where to put your long term investments based on what is most efficient for the household, regardless of who ‘earned’ the money that’s being contributed.
With pensions the concept is much the same, but a little more complex again. Because you receive tax relief on money that is contributed into a pension, it makes sense to maximise the contributions for the higher earning spouse.
However, once their contributions are maxed out, it could then be worth considering paying into the lower income earners accounts. Even if they don’t earn any income at all.
Some couples can be understandably a little nervous about totally combining their finances. The reality is that when you get married, your assets are effectively combined anyway in the minds of the courts.
While that will hopefully never become an issue, either way it makes the most sense to then consider your finances jointly, rather than trying to keep things as separate as possible. This way you can be sure that you’re maximising your allowances and growing your wealth in the most effective way possible.
The details behind the strategy can be complex, but at Rosecut we’re always happy to have a no-obligation discussion around the type of plan that might work best for you.