Most people know that Inheritance Tax (IHT) payable on death at a rate of 40% on assets in excess of the £325,000 per person Nil Rate Band (NRB). Nowhere near as many realise that unmarried couples cannot inherit their partners estate above this figure tax-free, no matter how long they have been living together. This means that, without careful planning, unmarried cohabiting couples could face significant IHT bills on both first and second death.
The Spousal Exemption was introduced in 1974, which 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 passed to the survivor free of IHT. It also meant that their Nil Rate Band remained unused so, upon second death, the allowances can be combined, increasing the available relief up to £650,000. Furthermore, with the latest Residence Nil Rate Band legislation, this has meant that couples can leave up to £1million to their heirs completely free of Inheritance Tax. A great result.
However, no such allowances can be enjoyed by the 3.2 million unmarried cohabiting couples in the UK.
I am sure that you are all thinking that marriage is the only way to protect you from this. But there is good news for those that choose not to get married that will protect you and your estate.
So, what can you do?
Firstly, it is absolutely vital that you make a Will. If you and your partner are not married then you are not automatically a beneficiary of their estate, regardless to the duration of the relationship. This can mean not only do you fail to inherit the assets tax efficiently, but you are likely not inherit at all!
Unmarried couples can also explore investment options to protect their estate from IHT. A key area of focus being Business Property Relief, which gives 100% IHT saving after 2 years. This piece of legislation has been in place since 1976 and allows the investments to grow, whilst giving full access if needed and allows the investments to be passed on to any beneficiary of the holders choosing, free from Inheritance Tax.
Trust planning also enables estates to be passed on without double taxation on second death. Again, this is using tried and tested legislation which has been used for many years and which is simply considered to be prudent planning. You can select your beneficiaries and ensure your wealth is passed down according to your wishes.
These strategies mean unmarried couples can leave a growing, IHT-free legacy without having to walk 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.
