Many couples in long-term relationships maintain independent finances, but typically also operate one or more joint accounts to cover day-to-day bills or for savings. There are a number of benefits and risks to managing money together.
On the simplest level, a joint account can help couples keep track of their finances and ensure costs are spread fairly. Both partners have equal access to their shared funds, regardless of who has contributed what. But differing attitudes to spending and saving can be a source of tension.
If you buy a home together, or just open a joint bank account, your finances become interlinked, creating potential pitfalls. For instance, shared finances could affect your credit rating, as you will be ‘co-scored’ if you apply for credit. This means a partner with a poorer credit score may impact on your own rating. Remember, if you have a shared mortgage or loan, you will be liable for the whole debt if your partner can’t – or won’t – contribute to the repayments.
However, there are advantages alongside the potential risks. For instance, if one partner is a basic rate taxpayer or non-taxpayer and the other pays income tax at a higher rate, it could be worth switching some savings or investments to the lower earner to reduce the overall tax payable.
Sharing the ownership of investments could also save capital gains tax (CGT). This could allow both partners to use their annual CGT exempt amount of £11,700 for 2018/19, giving a potential £23,400 of tax-exempt gains this tax year. Husbands and wives and civil partners can normally transfer assets freely between each other without incurring a tax on any gains realised by the gift. However, unmarried couples may create inheritance tax issues, or find themselves with tax to pay on gains realised by making such gifts of assets.
Higher earners can choose to contribute to the pension of a lower-earning spouse, subject to the annual allowance, with the amount of tax relief available the greater of £3,600 or their relevant UK earnings. This could help couples make best use of both their personal allowances for income tax in retirement.
The key to successful joint finances is trust and openness. Couples must be prepared to have full and frank discussions about their earnings, financial goals and future aims. Let us know if we can help.