Unmarried couples may overlook the need for inheritance tax (IHT) planning. Various tax advantages are available in the UK to those who are married or are in civil partnerships. Inheritance tax is no different in this respect. Any assets which pass between spouses or civil partners resident in the UK – whether on death or during lifetime – are exempt from IHT altogether. In addition, if a married individual leaves their estate to their spouse on their death, their unused IHT threshold (“nil rate band”) passes to their spouse’s estate to be used on the second death. Generally, this means an estate of up to £650,000 on the second death will be free of IHT, rather than simply the basic £325,000 nil rate band which each individual is entitled to. Unfortunately, these benefits do not apply to couples who are not married or in a civil partnership.
Where does this leave unmarried couples?
Unmarried couples do not benefit from these IHT advantages. This does not mean that IHT planning should not be considered. If anything, the opposite is true: further thought should be given to IHT planning if you are not married or in a civil partnership. There are various ways to mitigate against IHT if you are not married.
The Residence Nil Rate Band
This additional IHT allowance is available where a house is passed to direct descendants on death, subject to the total value of the estate not exceeding £2 million at which point the value of the allowance begins to taper. Direct descendants are your children/grandchildren and your step-children/step-grandchildren. The rules in this area are somewhat complex. In essence, if an unmarried person leaves their house to their children/grandchildren, they are entitled to an additional IHT allowance of up to £175,000, or to the value of their interest in the house (whichever is the greater).
For a married couple, any unused residence nil rate band from the first death can be claimed on the death of the second spouse. This means they have up to £350,000 additional allowance. However, the same does not apply for an unmarried couple. For unmarried couples the residence nil rate band of the first to die might be lost if they don’t pass their house to their children/grandchildren. Therefore, an unmarried couple might want to consider leaving their interest in the house to their own children to benefit from the extra IHT allowance.
One way to reduce the value of your estate for IHT purposes is to make use of lifetime gifts. There are various allowances/exemptions in this regard including:
- an allowance for ‘small gifts’ of £250,
- an annual allowance of £3000, and
- gifts made in consideration of marriage.
In addition, there is a specific exemption for regular gifts that are made from an individual’s surplus income rather than capital. The amount that can be gifted is unlimited subject to the specific rules of this exemption being satisfied. As a result, this can be a particularly useful IHT planning tool.
Any gifts that are made that do not fall within one of the exemptions, will still reduce the value of your estate on death provided that:
- you survive for a period of 7 years after the date of the gift, and
- you do not retain any benefit from the gift being made.
Early planning around gifting for unmarried couples can therefore help reduce their IHT liability.
All donations to UK registered charities, whether on death or in lifetime, are exempt from IHT. Additionally, if 10% of your estate is left to charity, the rate of IHT paid on the rest of your estate is reduced. So, if a major beneficiary of your estate is a charity, the amount of IHT due on your estate is likely to be reduced.
Business Property Relief and Agricultural Property Relief
In some circumstances, assets, including certain investments, can qualify for one or both of the above reliefs. This can reduce the amount of IHT due by either 50% or 100% depending on the specific circumstances.
The rules in relation to IHT on trusts are complex. Trusts do not absolve an estate from all IHT liability. However, setting up a trust and transferring assets into it in the right circumstances can potentially be a worthwhile method of reducing IHT on your estate. You would need to consider carefully which assets are to transfer to the trust, which type of trust is most appropriate, and who the trustees and beneficiaries of the trust should be.
Unmarried couples may not benefit from the spouse exemption rules for inheritance tax, but there are still several planning opportunities available.
Our experienced solicitors would be happy to discuss your situation if you wish to take advice in relation to reducing the IHT liability on your estate. Please contact our Personal Law team on 0131 225 7558 to speak to one of our Personal Law Solicitors.
The content of this page is for information only. It is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Gibson Kerr Ltd accepts no responsibility for the content of any third party website to which this webpage refers. Gibson Kerr Ltd is regulated by the Law Society of Scotland.