18 September 2020
Couples who live together are sometimes called “cohabitees” however this is not a legally recognised relationship for tax purposes.
Unless a couple chooses to marry or enter a civil partnership; they are at a disadvantage from a tax perspective.
This is because married couples and civil partners benefit from spouse exemption which means that they can make gifts to each other tax-free.
The second way in which unmarried couples are at a disadvantage is because they cannot transfer an unused nil rate band to each other.
What is a Nil Rate Band?
When a person dies; their personal representatives will value their Estate (including their property, savings, investments and personal belongings) and determine whether the net value falls over the Nil Rate Band. This is a tax-free limit currently set at £325,000. The balance of the Estate above the tax-free band will potentially be taxed at 40% (FORTY PER CENT).
If a married person or civil partner leaves their entire estate to their spouse it is a tax-free gift. They haven’t used any of their tax-free band. When the surviving spouse dies: their personal representatives can apply to transfer the late spouses’ unused tax-free band.
Example 1:
Gina Aldridge-Brownlee dies in 2019 leaving her Estate of £500,000 to her civil partner Amy who inherits the whole £500,000. There will no tax liability because of spouse exemption.
When Amy dies; her personal representatives will have her own tax-free band of £325,000 to use. They can also apply to transfer Gina’s unused tax-free band. This means that the first £650,000 of Amy’s Estate of £700,000 will be inheritance tax-free. The tax liability is £20,000.
By comparison....
Example 2:
Alan Aldridge and Beatrice Brownlee are an unmarried couple. Alan dies in 2019 leaving his Estate of £500,000 to his cohabitee, Beatrice. She only inherits £430,000 because there is £70,000 due in inheritance tax.
When Beatrice dies, the first £325,000 of her Estate of £700,000 will be inheritance tax free. The second tax liability is £150,000.
This means that not being married has cost Alan and Beatrice £220,000 in inheritance tax overall.
This system seems very unfair. At present you have to opt-in to the available inheritance tax benefits by formalising your relationship. The Law Commission is reviewing this situation. However, for now you may want to consider a civil partnership or getting married as a practical step to avoid significant tax liabilities.
If you would like advice on inheritance tax please contact our approachable and experienced Wills, Trust and Probate lawyers based at our Bournemouth and Christchurch offices. For advice on Pre-Nuptial Agreements please contact our friendly and knowledgeable Family lawyers.
