- Tax, Wealth management
When it comes to relationships and money, where you sit on the marriage spectrum can matter. This is because some tax rules (such as on inheritance) permit married and civil partners to transfer assets and allowances to each other tax-free, but currently don’t give the same protections if you live together or otherwise share a life unmarried.
Until the rules change, unmarried couples have some special considerations to make about inheritance tax and the financial security they wish to leave behind for loved ones.
Careful planning is the key. We analyse the main rules and what you should know.
For married or civil partnered couples, there is typically a full IHT exemption for the transfer of assets between them irrespective of whether the asset is transferred during their lifetime or from their estate.
In the UK, individuals receive a nil rate band (currently £325,000) which is the amount up to which transfers can be made without incurring any inheritance tax. There is an additional rule for couples who are married or in a civil partnership allowing them to transfer any unused percentage of this nil rate band from the deceased to the surviving spouse or civil partner.
It is worth noting that particular care needs to be taken if one spouse is domiciled outside the UK, or on second marriage as there are some complications and potential restrictions which would need to be considered.
For couples who are not married or in a civil partnership, lifetime gifts as well as the assets transferred on death could give rise to an IHT tax charge at a rate of up to 40%. Additionally, unmarried couples cannot transfer unused IHT nil rate band between them.
If an individual dies without a valid will, whomever inherits their estate will typically be governed by the rules of intestacy. Under the intestacy rules, the standard position is that, on the first death, where an individual is married or in a civil partnership and has children, the surviving spouse inherits all or a set proportion of the estate, depending on the estate value, with the remainder being shared by the children. The division of assets varies depending on which part of the UK the deceased was domiciled in. If the person who died was married or in a civil partnership and has no children, the surviving spouse will inherit the deceased’s entire estate.
Whilst the above treatment might work for some couples; it might not be the desired outcome for others. Although children include adopted children for the purposes of the intestacy rules, it does not include stepchildren unless they have been adopted by their stepparent. This could be particularly relevant to blended families.
If the couple is not married or in civil partnership, the estate may be inherited by the individual’s parents or siblings rather than by a co-habiting partner, again, this may not be in line with the individual’s wishes.
One solution to avoid the intestacy rules from applying is for each person to draw up a will. A will gives an individual the flexibility to distribute their estate in any way they choose and to anyone they choose, regardless of their legal relationship with that person, although an element of forced heirship still exists in Scotland.
It is important to note that some assets pass outside of the will. This includes jointly held assets that may pass to the joint owner. Pensions and life insurance policies usually pass in accordance with a death benefit nomination.
In addition to peace of mind, drawing up a will can also make a couple’s Inheritance Tax (IHT) position more efficient. This is particularly valid for couples that are married or in a civil partnership as spousal transfers are normally IHT free. The surviving spouse also inherits any remaining Nil Rate Band (currently £325,000) and, if available, the Residential Nil Rate Band from the deceased.
While there is no strict requirement for a will to be drawn up by a specialist, it is best practice for a solicitor to be involved in the process, especially where there is complexity around the family’s affairs. Poor drafting of a will can cause issues and disputes following an individual’s death. Dealing with this after an individual’s death may result in additional legal costs and may result in the estate being distributed in a way that was not intended.
If you would like more information or to speak with one of our wealth planning and tax experts, please don’t hesitate to contact us .
Content on this page is provided for general information and is subject to change and does not constitute advice.
If you would like to know more for your own situation, please do not hesitate to contact us.
We would be delighted to discuss this with you in more detail, taking your circumstances into account.