Inheritance tax planning for unmarried couples can be complicated. While husbands, wives and civil partners enjoy certain spousal exemptions, the same rules don’t apply if you haven’t tied the knot.
With the number of couples living together outside of marriage rising significantly in recent years, it’s increasingly important for these partners to understand their inheritance tax planning opportunities.
Inheritance tax planning for unmarried couples
Thresholds and allowances
The inheritance tax allowance is currently set at £325,000. If your estate exceeds this amount, inheritance tax will usually be payable at 40% of the assets above the threshold when you die.
This threshold can increase up to £500,000 if you give away your main residence to your children or grandchildren in your will.
For married couples, if one spouse or civil partner passes away and leaves their entire estate to the surviving partner, they will be exempt from paying inheritance tax — no matter the estate’s value.
This often leaves part or all of the first spouse’s allowance unused, which can then be transferred to their widow or widower. That means that the second spouse could potentially have a tax-free allowance of up to £1 million when they die.
Meanwhile, unmarried couples are liable to pay inheritance tax at the standard rate, regardless of how long they’ve cohabited — or even if they have children together.
In some circumstances, inheritance tax may be charged on the same estate twice: once when the first partner dies and again upon the second death.
Any property that the cohabiting couple owns jointly will pass to the surviving partner when one of them dies. However, the deceased’s share of the property will still form part of their estate — so that may not be exempt from inheritance tax, either.
What’s more, your unmarried partner won’t be able to add your unused threshold to their own when you pass away.
How to reduce your inheritance tax bill
Writing a will
Your unmarried partner will have no right to inherit if you don’t leave a will, making it especially important to write one. A will can also play an important role in any inheritance tax planning.
For example, if you gift more than 10% of your net value to charity in your will, your estate will be charged at the 36% rate of inheritance tax rather than the standard 40%.
You may also want to consider leaving a discretionary trust for your surviving partner and any dependents.
Writing up a tax-efficient will is no easy task, so it’s a good idea to work with will-writing experts.
Giving gifts to your partner
Gifting assets such as money or property to your partner can help reduce your inheritance tax liabilities, but you need to be careful. Depending on the asset’s value and when you decide to gift it, your partner may still end up paying inheritance tax on it after your death.
If you run your own company, you may have other tax planning options at your disposal. For example, you can usually pass on assets that qualify for business relief to a person of your choosing (such as your partner) entirely free from inheritance tax.
However, since this area of tax can be difficult to navigate, it’s essential to speak with your accountant before making any major financial decisions.
Should you get married?
While there are plenty of financial incentives to tie the knot, having a wedding to simply further your tax planning opportunities won’t appeal to everyone. Choosing whether to get married or not is an entirely personal decision that only you and your partner can make.
A good inheritance tax strategy requires a trained eye to get right, no matter your marital status. Our comprehensive wills & probate services are designed to help ensure your loved ones are looked after when you’re gone.
Get in touch with us today to learn more about inheritance tax planning for unmarried couples.