Tying the Knot and Tying Up Loose Ends

25 February, 2025 4 minutes reading time

Inheritance Tax and Your Spouse or Civil Partner

For many couples, marriage or civil partnership celebrates love and commitment. However, beyond this emotional bond, we often overlook vital legal and financial implications, especially inheritance tax (IHT). Understanding these implications is essential for ensuring your assets pass to loved ones as you wish and for easing potential financial burdens during difficult times.

Clients often remain unaware of the significant IHT benefits available to married couples and civil partners. Let’s explore why “I do” truly matters.

Valuable Spousal Exemption

The “spousal exemption” lies at the heart of IHT advantages for married couples and civil partners. Here’s how it helps:

1. No IHT on Transfers: When one partner dies, any assets left to the surviving spouse or civil partner are generally exempt from IHT, regardless of value.

2. Transferable Nil Rate Band (NRB): If you don’t fully use your NRB (currently £325,000) when you die, you can transfer the unused portion to your surviving spouse or civil partner. This effectively doubles their NRB to £650,000.

3. Residence Nil Rate Band (RNRB): If you own your home and plan to leave it to direct descendants, you may qualify for the RNRB. You can also transfer this allowance to your surviving spouse or civil partner, potentially adding another £175,000, doubling to £350,000 if unused. 

Why This Matters

Unmarried partners face a 40% IHT on assets exceeding the individual NRB without the spousal exemption and transferable allowances. This profoundly impacts loved ones. As consumer advocate Martin Lewis stated, “Death is where marriage really counts.” His words highlight the financial security marriage or civil partnership provides.

Examples in Practice

Consider “Alex” and “Beth,” who have lived together for 20 years and have combined assets of £950,000. If Alex dies, their situation unfolds as follows:

Married or in a Civil Partnership

Because of the spousal exemption, Beth inherits Alex’s share of assets without immediate IHT liability. When Beth dies, her estate benefits from Alex’s unused NRB, allowing a combined £650,000 to pass tax-free. If they leave their home to direct descendants, they can combine their RNRBs for an additional £350,000. With thoughtful planning, they pass £1,000,000 without IHT.

Co-habiting or Unmarried

As a cohabitee, if Alex’s assets are £475,000, his estate faces IHT:

£475,000 – £325,000 (NRB) = £150,000.

£150,000 x 40% (IHT rate) = £60,000.

Beth receives £60,000 less than if they were married. She cannot access Alex’s unused NRB, so only her own NRB applies when she dies. This results in a £60,000 tax on the first death, avoidable through marriage, and potential further tax when Beth dies.

As Alex and Beth’s example illustrates, the financial consequences of being unmarried can be significant, highlighting the need to consider whether the current inheritance tax framework is out of step with modern relationships. Many couples choose not to marry, yet they are significantly disadvantaged regarding inheritance tax. This raises questions about the fairness of a system that prioritises marital status. As societal norms evolve, whether the law will adapt to reflect modern partnerships remains to be seen.

Our Advice

Navigating the world of inheritance tax can feel overwhelming, especially during emotionally charged times. While the spousal exemption offers significant financial protection for married couples and civil partners, proactive estate planning can significantly mitigate potential burdens for cohabitees.

Crafting a comprehensive Will is essential for everyone. However, alongside exploring a cohabitation agreement, a professionally drafted Will can solidify financial rights for couples who choose not to marry. Furthermore, utilising trusts offers a strategic approach to asset management, potentially reducing tax liabilities. Lifetime gifts (mindful of the seven-year rule) can further diminish estate value. Life insurance policies written in trust provide a financial safety net for surviving partners, and carefully considering joint property ownership is also vital.

Careful estate planning (including regular reviews) is crucial for everyone, regardless of marital status. Don’t leave your family’s future to chance. Please contact us if you have any questions about making a Will, IHT or any other aspect of estate planning. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.

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