Money and marriage: Don't let financial affairs ruin your relationship
To stay together, couples must be honest about money matters, says James Daley
Saturday 26 July 2008
Anyone who has ever been in a relationship is sure to have had a row with their partner about money. Differences in salary, savings and spending habits all help to drive a wedge between the average couple, and in some cases, financial stresses can be enough to lead to the complete breakdown of a relationship.
"Couples do argue about money an awful lot," says Denise Knowles of Relate, the relationship counselling service. "And these arguments can come in all sorts of guises. They may not overtly say that money is the problem, but it may be that they're angry that one person is going out more than the other, or that one person pursues expensive hobbies. It's amazing how many people don't even know what their partner earns or how much they spend."
But pulling your finances together doesn't have to be a cause for disaster. In fact, for those who take a pragmatic approach to money, there can even be financial advantages to merging your affairs. Below, we look at some of the obvious and not-so-obvious things for couples to think about.
As you might expect, both Citizens Advice and Relate say that the most important step to avoiding fights about money is to be honest with your partner – and to talk about your financial position. "Lots of arguments are about one person not pulling their weight when it comes to household bills," says Knowles.
One simple way to avoid this problem is to set up a joint account, into which both partners make a monthly contribution, and from which all your household bills are then paid. Many couples decide to make the monthly contribution proportionate to their salary – ie, if one person earns £50,000 a year and the other earns £25,000, the larger earner puts in two-thirds of what is needed each month.
Knowles says that the advantage of this model is that each individual is then left with their own pot of money with which they can do what they like. However, she stresses that it's important that all joint bills – including car insurance and food bills – are funded from the joint account.
If you do open a joint account with your partner, it's worth remembering that they will then be linked to your credit record, and if they have a worse credit score than you, this could affect your ability to get credit in the future. If you break up from a relationship, it's important to get in touch with the credit reference agencies, to ensure that the link to your former partner is removed from your file.
Finally, it's also worth remembering, that if you're not married and one of you dies, everything in a joint account will still be available to the surviving partner. Anything remaining in the personal account of the deceased will pass on to their estate, which will be awarded to their family, unless they have written a will.
Until about eight years ago, married couples received a more favourable tax treatment. However, this was abolished by Gordon Brown at the turn of the decade, and only couples where one partner was born before April 1935 now qualify for this break.
However, Mike Warburton of accountants Grant Thornton says there are still ways in which married couples can reduce their tax burden. "What couples should be doing is taking full advantage of their annual personal allowance, their annual basic rate tax allowance and their annual capital gains tax (CGT) allowance," he says. "If one partner isn't working, for example, it makes sense for investments and savings to be held in their name. I don't own any investments, they're all in my wife's name, as she's a lower earner than me."
For the moment, it's legal to gift assets to your partner without incurring a capital gain or income tax liability. Hence, if you're being taxed on the income from your investments, but your partner is not working, it makes sense to put the assets into their name, so that they make use of their tax-free allowance.
From October, everyone in the UK will be exempt from tax on the first £6,035 of their income. After that, the next £34,800 is taxed at 20 per cent, and anything else at 40 per cent. So if you're paying tax at 40 per cent, but your partner is only paying 20 per cent, it may make sense for them to hold any income-bearing assets.
Beware, however, that the ability to move assets between married partners may change. The Government recently tried to force a couple to pay more tax, after it realised that they had been sharing the income from their business equally, even though only one of the pair was doing most the work. Although it lost its court case against the couple, HM Revenue and Customs has made it clear that it wants to crack down on couples who try to reduce their tax bill in this way.
Warburton says that another advantage of being married is that under new rules introduced in this year's budget, couples can effectively pool their inheritance tax (IHT) allowances. Although everyone has an IHT allowance of £312,000, it's now possible to pass all your assets on to your partner when one of you dies, with IHT only due on anything above £624,000 once the second partner dies.
Like all tax laws, however, these could change again in the future. The Shadow Chancellor, George Osborne, has said that he will raise the IHT threshold to £1m if the Tories are elected – which would mean most families would never need to worry about being hit for the tax.
Finally, Cox says that partners should not fail to take advantage of their ISA allowances. All UK taxpayers can put up to £7,200 into a stocks-and-shares ISA each year, and if one partner has already used their allowance, it makes sense to make use of the other partner's allowance before making other savings, which will be less tax-efficient.
Once you're married, both partners have a claim on the household assets – and, as messy divorces such as that of Paul McCartney and Heather Mills have shown, it can often take a court battle to decide who owns what.
One way of potentially avoiding this is to draw up a pre-nuptial agreement before you get married, which details exactly who owns what. However, Knowles of Relate warns that pre-nups are not actually legally binding, and should not be relied upon. "Pre-nups help you to see clearly where you started from, and although they may be taken into account by a court, they are not legally binding," she says.
Research from Scottish Widows published this week reveals that nine out of 10 couples said they had never even considered taking out a pre-nup. But many said that, with hindsight, they wished that they had.
If one partner in a couple earns most of the money, it's worth thinking about taking out an income protection insurance policy to protect against the possibility of them being unable to work. It's also worth considering buying life insurance, so that you'll be left with some money if the breadwinner dies. If you've got children, taking out some form of protection is even more valuable. To get independent advice on your protection needs, visit www.lifesearch.co.uk
For more information about couples' finance, take a look at the Citizens Advice guide at www.adviceguide.org.uk/index/family_parent/family/cohabitation_and_marriage_legal_differences.htm. For couples counselling, visit Relate's website at www.relate.org.uk. To find a financial adviser in your area, visit www.unbiased.co.uk.
Buying a property
Buying a flat or a house with someone is a major commitment, and it's worth taking the time to have some legal documents drawn up showing exactly who would be entitled to what if you were ever to split up. If you are going to be providing different amounts towards the deposit, and paying different shares of the mortgage, you should register yourselves as "joint tenants in unequal shares" when you buy the property, and should draw up a "deed of trust" laying down who owns what.
Though it may sound rather clinical – especially at a time when you may perhaps feel more certain than ever about your relationship – it will save you a lot of problem should you break up with your partner.
Matthew Cox of Skipton Financial Services says that how you own your property could also have an effect on the cost of long-term care, should you need to move into a nursing home in your old age. If the owners are registered as tenants in common, then the property cannot be taken into account when the local authority is calculating your entitlement to care-fees assistance – as long as the other partner is still alive.
If you are married, then according to Citizens Advice both partners have a right to remain in the home if you split up, regardless of who bought it or who has a mortgage on it. However, if your partner is the sole owner, you need to register your "home rights" with the Land Registry in order to protect your interests. This will stop your partner from being able to sell the property from under you, should your relationship end in more acrimonious circumstances.
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