IHT planning for unmarried couples

Una Angus from Thomson Snell & Passmore

A common misconception

Unmarried cohabiting couples make up just over 13% of the population in the UK. Many of these people share a common misconception. They believe that when it comes to their legacy, the rules that apply to married couples also apply to cohabiting couples, the so called ‘common law spouse’.

We’ve once again turned to one of our legal experts Una Angus at Thomson Snell & Passmore LLP to answer key questions that regularly crop up.

How might this impact any Inheritance Tax planning?

Every individual has an Inheritance Tax (IHT) exemption referred to as the nil-rate band (currently £325,000 and frozen until 2026). There is also an additional IHT exemption referred to as the residence nil rate band (currently £175,000 and frozen until 2026) which is available if certain criteria are met. However, unmarried couples do not have the same IHT benefits as their married counterparts. There is no spouse exemption and the nil rate band and, if applicable, residence nil rate band are not transferrable between an unmarried couple.

When one partner in an unmarried couple dies, the available IHT exemptions are applied to the value of his or her estate. If the value of the estate exceeds these, the excess will be taxed at 40%. This rule applies even if the whole of their estate is left to their surviving partner in their Will.

Without a Will, things can become even more complicated

All of the above assumes that the couple have Wills in place that name one another as beneficiaries. With estimates ranging from 53% – 68% for UK adults who have not made a Will, this is unlikely to be the case for millions of people.

At the most fundamental level for unmarried couples, if one partner were to die without a Will in place and assets are not in joint names held as joint tenants, the surviving partner will inherit nothing. In this situation, if the partner that has passed leaves children, these children will almost certainly inherit the entire estate. If there are no children, everything will most likely pass to the deceased’s family under the Intestacy Rules.

Many surviving partners in these circumstances are left in complicated situations at a time that is already extremely difficult. They may find they are left arguing that some of the assets in their partner’s name were actually jointly owned. They may even have to bring an action for reasonable financial provision under the Inheritance Act 1975. Under this, the level of provision that must be provided for a cohabitee is lower than for married couples. This is regardless of the length and extent of the cohabitation.

These situations can become damaging very quickly. A surviving partner may find themselves losing a significant portion of their partner’s estate in legal fees, on top of any IHT liabilities. An honest and frank discussion with your advisers is critical to avoid later costly and emotionally damaging family disputes over the distribution of a loved one’s estate.

What can unmarried couples do to mitigate their exposure to IHT?

As well as ensuring valid Wills are in place to guarantee assets are distributed in accordance with your wishes, it is important for unmarried couples to plan ahead as they cannot use the IHT spouse exemption.

Find out more

You can learn more about common law spouse and inheritance, from an article that Una recently wrote.

Una’s colleague, Amy Lane, is shortly publishing a blog post on the Thomson Snell & Passmore website. Keep your eyes open for advice on how to use life assurance and inheritance tax investment services to preserve wealth accumulated between unmarried couples.