What Are The Inheritance Tax (IHT) Implications Of Not Being Married?

/ estate planning

Marriage isn’t for everyone.  Some are quite happy being single.  Others are happy living together as a couple without ever feeling the need to formalise their arrangement by marriage or civil partnership.   In the modern world we live in, it might seem odd that being married could save you thousands, tens or even hundreds of thousands, in taxes on your death.   But that is the reality I am afraid.   This could be a very short blog but the simple advice to save your estate a lot of money in taxes, might be to get married.

Why?

You may know that upon your death, your personal representatives can apply your £325,000 Inheritance Tax allowance to your estate, upon which you pay tax at the ‘nil rate’, known as your nil rate band.    As well as considering any gifts you made in the previous 7 years, everything you own upon your death is valued and any assets you have above the nil rate band, is taxed at 40%.

As a basic example of IHT notwithstanding marriage and children

  • you have made no gifts in the previous 7 years,

  • you own a house in your own name without a mortgage worth £400,000,

  • you have £50,000 in savings,

  • you have the full NRB allowance of £325,000 available to your estate

  • your PRs would pay tax at 40% on the £125,000 that’s over your nil rate band;    

  • Therefore, your PRs would pay £50,000 in tax to HMRC.

What happens if you’re married?

As an example of the same scenario, but in this case, say that you are married or in a civil partnership.  You also have two children together.  You leave everything to your spouse in your Will or failing that your children.  Your spouse does the same.  They have £300,000 of assets also in their own name.   You die first.

  • The transfer of your assets to your spouse would be what is known as ‘spouse exempt’,

  • your PRs will not have to pay any tax upon your death.

  • Your spouse dies and having inherited from your estate, their estate is now worth £750,000.

  • your Nil Rate Band can be transferred to your spouse upon their death, your NRB can be added to theirs to boost the available allowance before tax is paid to £650,000.

  • Ordinarily, there would be tax to pay over the £650,000 at 40% leaving a tax bill of £40,000.

  • However, as there is an eligible property which is being left to your children (direct lineal descendent) your spouse’s PRs can also apply an additional ‘residence nil rate band’ (“RNRB”) to the estate.

  • This brings the available allowance before which tax is paid to £850,000

  • In addition, your spouse’s PRs can also claim an additional ‘transferable residential nil rate band’ for you, which boosts the available allowance further to £1,000,000.

  • There is no tax to pay.

However, using the above example, say you were not married but in a long-term relationship together.

  • The transfer of your assets to your partner would not be ‘spouse exempt’.

  • your PRs will have to pay tax on your death of £50,000. 

  • your Nil Rate Band cannot be transferred to your partner upon their death, so upon their death their available allowance is £325,000.

  • Your partner’s assets total £700,000 with the funds they have inherited from you (less the £50,000 paid on your death).

  • As there is an eligible property which is being left to your children (direct lineal descendent) your partner’s PRs can also apply an additional ‘residence nil rate band’ (“RNRB”) to the estate

  • Your partner’s PRs cannot claim the additional ‘transferable nil rate band’ from you as you were not married upon your death.

  • This brings the available allowance before which tax is paid at 40% to £500,000.

  • There is tax to pay of £80,000 upon your spouse’s death

  • This is in addition to the £50,000 already paid when you died taking the total paid as a couple to £130,000.

Some people also mistakenly believe that if they hold assets ‘jointly’ rather than as ‘tenants in common’ there will be no tax to pay. It is correct that joint assets pass automatically to the survivor outside of the terms of your Will.  Because they do not pass in accordance with your Will or the rules of intestacy your PRs likely won’t have to make an application for a Grant of Probate to access your assets. Joint assets are still however in your estate for inheritance tax purposes and so your PRs will still need to complete an Inheritance Tax return declaring the full value of your estate. This is therefore an ineffective way of trying to avoid paying inheritance tax, and can lead to penalties for your PRs if a return is not submitted to HMRC when it should have been.

So, I hope you can see, getting married is not just a celebration of love, but can also be a celebration of savings of tax upon death!  If you think that marriage might be effective tax planning for you, it is worth seeking advice on your position. 

If you would like to discuss anything raised in this blog, please contact Jen Bleby by email or on 01494 893526.