Do you know that the legal position for cohabiting couples is NOT the same as married couples? Cohabiting couples simply do not receive the same benefits and succession rights.
Inheritance tax (IHT) planning that is simple and normal practice for married couples may not therefore be the best option when it comes to unmarried couples.
Inheritance tax (IHT) is payable at 40% on death on assets in excess of the nil-rate band (currently £325,000).
There are certain practical steps cohabitees who want the same tax advantages as married couples can take, although the most certain one does involve wedding bells!
A married couple can easily leave everything to each other in their Will and on the death of the first person their estate will be free of IHT (known as ‘spousal exemption’),and then on the death of the second person their estate will benefit from two persons Inheritance Tax relief rates (known as ‘transferrable Nil Rate Bands’)Unmarried couples however do not benefit from either the spousal exemption or the transferable Nil Rate Band.
The estates of an unmarried couple leaving everything to each other would therefore be subject to consideration for IHT on both first death and second death and without the benefit of two NRBs on second death. This could lead to an unnecessarily high IHT charge on second death.
Let’s look at an example…
Simon and Sue are a married couple owning £300,000 each. They have no joint children, but Simon has children from a previous relationship.
Simon dies first, leaving a life interest in their home for Sue and residue to her outright. On his death no IHT is due thanks to the spousal exemption and his unused NRB and Residential NRB are available to transfer to Sue.
On Sue’s death, she passes her estate of now £600,000 to Simon’s children. As her estate benefits from her own NRB, and Simon’s unused NRB, no IHT would be payable on her death. Whilst her estate does not need RNRB, stepchildren are classed as direct descendants for the purpose of RNRB.
Imagine this same scenario, but Simon and Sue were not married.
On Simon’s death, no IHT would be payable as his estate is below the NRB. On Sue’s death however, her estate will only benefit from her own NRB. This would mean that once you deduct Sue’s NRB of £325,000 from £600,000, this would leave £275,000 subject to IHT at a rate of 40%, making her IHT bill approximately £110,000. Her estate would also not qualify for RNRB, as her late partner’s children would not come under the definition of direct descendants for RNRB purposes (because they are not stepchildren)
So, what’s the solution…
The simplest step is for them to make a Will that makes provision for a surviving cohabitee.
There are ways in which assets can be left under a Will to an unmarried cohabitee in a tax efficient manner. Rather than leaving assets to the partner outright, or to a Life Interest Trust where the partner will be seen as inheriting the assets for IHT purposes, they could consider using Nil Rate Band Discretionary Trusts within their Will
The Wills would leave assets up to the value of the NRB to a Discretionary Trust, of which the partner and others (possibly children) are discretionary beneficiaries. The Trust is its own legal entity and the Trust therefore owns the assets rather than the partner.
If Simon and Sue had used NRB Discretionary Trusts, on Simon’s death no IHT would be payable as his estate is below the NRB. All assets would pass to the Trust, with Sue taking the benefit during her lifetime. On Sue’s death, she will only own £300,000 worth of assets. As this is below the NRB, it will pass IHT free to Simon’s children.
For the purpose of this article, all references to married couples also include civil partners.
Would you like some professional advice?
If you are putting off writing your Will because you are unsure of how to go about it or can’t decide on the fine detail, then there is no need to worry. To provide you with peace of mind, you can discuss your situation and concerns with Trusted Law.
We will work with you to agree what is best for you both and your family. Everything we discuss will always be private and confidential, and you will never feel rushed or pressured.
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Please note that this information is provided as a guide only and in accordance with the current laws as at the date of publishing.
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