Avoiding IHT doesn’t mean rushing to tie the knot

Currently, there are around 3.3 million unmarried cohabiting couples in the UK.

Yet most legislation focuses mainly upon protecting married couples when it comes to estate planning, meaning that many cohabiting couples face large Inheritance Tax (IHT) charges on both first and second death.

This is because unmarried couples do not benefit from spousal exemptions and a variety of other legislation that serves to protect the legacy of married couples

Now, I am sure that I know what you are all thinking at this point … but no, you don’t have to tie the knot in order to protect yourself!

IHT is payable on death at 40% on assets in excess of the Nil Rate Band (NRB), which currently stands at £325,000 per person. The spousal exemption was introduced in 1974 and allowed married couples to leave their entire estate to their surviving spouse free of IHT.  So, if one partner in the marriage died, the estate passes to the survivor free from IHT free.  It also means that their Nil Rate Band remains unused.

Therefore, upon second death this unused nil-rate band can be combined with that of the second to die, in turn increasing the reliefs up to £650,000.  With the latest Residence Nil Rate Band legislation, this means that couples can, leave up to £1million to their heirs free of Inheritance Tax.

Although every individual has a nil-rate band of £325,000, unmarried couples do not benefit from the same exemptions as their married counterparts.  So, when one partner in an unmarried couple dies, the Nil Rate Band is applied to the value of their estate. If the value is in excess of this it will be taxed at 40% and still occurs even if their whole estate is left to their surviving partner.

This is why without careful planning, unmarried cohabiting couples could face IHT bills on both first and second death.   All of this assumes that the couple have Wills in place that name one another as beneficiaries.  However, alarmingly, estimates show that around between a half and two-thirds of UK adults have not made a Will.

One of the many options that unmarried couples can explore to protect their estate from IHT is Business Property Relief.  This piece of legislation has been in place since 1976 and allows qualifying investments to be passed on to any beneficiary of the holders choosing, free from Inheritance Tax.

Trust planning can also enable estates to be passed on without double taxation on second death.  Again, this is using tried and tested legislation that is not considered to be anything other than prudent planning.

This means that it is possible for unmarried couples to leave a growing, IHT-free legacy without walking down the aisle.  However, you need to discuss these matters now, as burying your head in the sand and hoping that everything will be OK is a sure-fire way of keeping HMRC happy, rather than establishing the legacy you would like to leave.

If this article has made you wonder what you could do to optimise your estate planning, then please contact us, so that one of our Wealth Strategists can explain the options available to you.