UK Inheritance Tax rules give tax breaks to married couples or in a civil partnership.
Anything left by one spouse to another is exempt from Inheritance Tax. When the surviving spouse dies, up to £1 million is exempt from Inheritance Tax.
These tax breaks do not apply to other couples.
Cost Of Inheritance Tax For Unmarried Couples
There are financial implications for unmarried couples when it comes to inheritance tax.
In the example below, ‘Simon’ and ‘Jane’ are fictitious, but their situation is based on previous clients.
Simon and Jane
Simon was previously married but lost everything in the divorce.
Jane got the house in her divorce. It is now worth £500,000 and mortgage-free, thanks to Jane's inheritance from her mother. Simon moved in 15 years ago, and they built up savings of £100,000 in a joint account.
Simon does not have children. Jane's daughter, Daisy, is 18 and lives at home. To her, Simon is “Dad”. Sadly, due to health problems, Jane has less than a year left to live.
About ten years ago, Simon and Jane wrote out Wills themselves. When one of them dies, the surviving partner will inherit everything. When they have both died, everything is left to Daisy.
Simon and Jane had not thought about Inheritance Tax. When I met them, as they are not married or in a civil partnership, I explained that when Jane dies:
(a) The joint account will pass to Simon, but half of the balance is counted as part of Jane’s estate for Inheritance Tax, so Jane’s estate is £550,000.
(b) Only the first £325,000 is exempt from Inheritance Tax. £225,000 will be taxed at 40%, making a tax bill of £90,000. To avoid selling their home, Simon will spend most of their savings on tax.
(c) When Simon dies (after Jane), only the first £325,000 of his estate is exempt from Inheritance Tax. Unless Daisy could borrow money to pay the tax bill of £74,000, she would have to sell the only home she has ever known.
Then I explained that if Simon and Jane were married or in a civil partnership, there would be no Inheritance Tax to pay when Jane dies or when Simon dies. Daisy would inherit £164,000 more and would not risk losing her home.
After hearing this, Jane and Simon arranged a civil partnership ceremony for the following month. Since the civil partnership would automatically cancel their current Wills, I prepared new Wills for them that could not be cancelled.
Inheritance Tax Advice For Unmarried Couples
There are other issues to consider that we do not have space for here.
If you are in a long-term relationship and concerned about inheritance tax issues, why not book a free initial appointment with Stephen Sampson or Jess Riseborough to discuss your own situation and the options available to you?
Contact us today using the details below.
You can also find out more about our Private Client team's services here.