Overcome the difficulties of IHT planning for unmarried couples

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. This is not the case.

Without considered inheritance tax (IHT) plans, unmarried cohabiting couples could face an IHT liability on both the first and the second death of the partnership. With more couples choosing not to marry, this lack of understanding around IHT legislation could have significant implications for many people across the UK.

However, there are steps that unmarried couples can take to reduce their exposure to IHT without having to tie the knot.

How are married couples protected against IHT?

IHT is payable on death at 40% on assets in excess of the nil-rate band. The nil-rate band currently stands at £325,000 per person. The full spouse exemption was introduced in 1974. This allows married couples to leave their entire estate to their surviving spouse free of IHT. Civil partnerships were introduced in 2004 and have the same effect for IHT purposes as marriage.

So, if one partner in a married couple or a civil partnership were to pass away, the estate passes on to the survivor IHT free and their nil-rate band should remain unused. As a result, upon the second death this unused nil-rate band can be combined with that of the second to die. This in turn increases the reliefs available to the second estate to up to £650,000.

These exemptions can save couples significant IHT bills.

Unmarried couples are not as fortunate

Every individual has a nil-rate band of £325,000. However, unmarried couples do not benefit from the same exemptions as their married counterparts.

When one partner in an unmarried couple dies, the nil-rate band is applied to the value of their estate. If the value of this estate exceeds £325,000, 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. The IHT will be paid before the estate passes on to the survivor.

If cohabiting, unmarried couples want to make provision for each other in their wills, even if only to enable the surviving partner to remain in a property until the second death, there is no spouse exemption.

Therefore, without a considered plan, unmarried cohabiting couples could face IHT bills both on the first and second death.

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 with no will in place and assets are not in joint names, 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. This will be on top of any IHT liabilities.

In addition, Jim Sawer of Kingsley Napley explains that having assets under joint names does not necessarily remove IHT concerns either. Assets passing by ‘survivorship’, if a couple is not married, will also be liable to IHT when they pass to the partner on death.

Tying the knot is not the only solution

All of this serves to highlight the importance of wills for unmarried, cohabiting couples. A will should serve as the starting point for a well-considered legacy plan. However, this is not the only step couples can take. There are a number of options they can consider in order to ensure their estate is protected from IHT.

Business Relief (BR) has been an established piece of IHT legislation since 1976. Owning BR qualifying assets, such as commercial forests and residential developments, for at least two years should allow them to be passed on free from IHT to any beneficiary of the holders choosing.

For cohabiting couples this can mean that one partner sets up a privately owned limited company with the Stellar Growth IHT Service. Whilst that partner is the sole shareholder in the company, they can appoint Stellar as company directors. Doing so puts our expert team of investment managers in charge of allocating their capital. This will be invested across our diverse range of BR qualifying activities.

This person can then name their partner as a beneficiary of their portfolio if they were to pass away. Providing the company has been running for at least two years, it should be able to pass to the beneficiary free from IHT.

This highlights that marriage is not the only way for unmarried couples to protect their estate from an IHT burden. As the number of marriages each year continues to fall, the importance of specific legacy planning for unmarried couples will only increase.

A BR qualifying investment can help unmarried couples leave a growing, IHT-free legacy without walking down the aisle.

To learn more about BR qualifying assets and how they could work for your clients, contact one of the Stellar team today on 020 3195 3500 or visit our Stellar Growth IHT Service page.


Written by Jack Dobinson


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