Cohabiting couples risk a 40 per cent Inheritance Tax (IHT) bill

How To Reduce Your Inheritance Tax Bill With Marriage Or A Civil Partnership20th Aug 2021

by Anthony Weber on 20th Aug 2021

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Cohabiting Couples Risk Huge Inheritance Tax Bills

Have you thought about getting married? No? Then how about a civil partnership? They’re available for mixed-sex and same-sex couples now.

Apologies if that sounded a little odd but on rare occasions my role as a wills and probate solicitor can sometimes feel like Paddy McGuinness on Take Me Out or the late Cilla Black on Blind Date.

That’s because I need to warn cohabiting couples about the huge financial risk they’re taking: they could be hit with Inheritance Tax (IHT) bills of 40% – simply because they’re not married.

Already married or in a civil partnership? There are things you need to worry about too when it comes to IHT. So keep reading and learn how to reduce your Inheritance Tax bills


Get Expert Legal Advice On Wills And IHT: Book A Chat


Why Cohabiting Couples Are Taxed At 40% For IHT

Sadly, the law treats cohabiting couples as complete strangers when one partner dies; the surviving partner can be liable for Inheritance Tax at 40%.

That’s a complete contrast to how the law regards married couples or civil partnerships: one person can bequeath all their assets to their surviving spouse/partner with no IHT liability whatsoever. Comedian Sir Ken Dodd married his partner Lady Anne two days before he died

But what if you don’t want to get married? Perhaps you’ve had an unhappy experience in a previous marriage. Or maybe you simply find the whole institution of wedlock a tad unnecessary and distasteful – you don’t need the state’s patriarchal approval to confirm how much you love your significant other. You love them more than life itself and that’s that.

But this reluctance to tie the knot could cost you thousands or even millions of pounds in Inheritance Tax (depending on your financial circumstances). And all at a time when you’ll be beside yourself with grief.


How Cohabiting Couples Can Beat This IHT Trap Without Getting Married

One solution for some cohabiting couples is a civil partnership. They’re as valid as any wedding. But without the baggage the word ‘marriage’ can bring.

This might seem like a small and semantic distinction. But if you’re a couple that doesn’t want to marry, it’s an important one that could spare you the misery of paying IHT at 40%. So please think about it.

After all, it’s your life. It’s your money. You worked hard for it. You paid tax to earn it. You probably paid tax on the interest. 


What If I’m Already Married Or In A Civil Partnership?

The good news (as you know from above) is that bequests between spouses and civil partners carry no IHT penalty. And there’s more…

As you didn’t need to use your £325,000 nil-rate band – or your £175,000 property nil-rate band – to leave money/property to your spouse, you can bequeath up to £500,000 to others and pay no IHT on it.

So you could leave up to £500,000 to your children (or anyone else) and the rest to your spouse/civil partner – the taxperson won’t see a penny of it.

Those £325,000 and £175,000 property nil-rate bands are available to anyone, regardless of whether you’re married/in a civil partnership or not. And if you don’t use them, they can be carried forward for when your partner dies. So they could leave £1 million to any person or group of people…with no IHT penalty.

But beyond those nil-rate bands, you need to think about marriage, civil partnership or other IHT-reducing opportunities.

You’d be surprised how many tax concessions that HM Revenue & Customs allows. They’re actually quite generous, which I concede is not something you ever thought you’d read about HMRC. All it takes is forethought and some legal advice from a wills solicitor.


Smart, Simple Ways To Remove Or Reduce Your IHT Liability

Please don’t put off your Inheritance Tax planning. Gently trickling money to your loved ones year after year can cut a future IHT bill dramatically. And the sooner you start, the more successful you’ll be.

Best of all, it doesn’t have to be complicated. We’re not talking about offshoring billions.

Here are some options:

  • You really should make a will – otherwise what happens to your estate will be out of your control. Making a will is simple; it doesn’t have to be complex, time-consuming and morbid. It’s the smart thing to do, the responsible thing to do.
  • Drip-feed money to your loved ones within the HMRC gift limits. Ask us about all the options. They include:
    - ‘small gifts’, wedding/civil partnership gifts
    - regular payment allowances
    - gifts you can still benefit from (such as giving away your property but still living in it, giving away your caravan but using it free for holidays, giving away a valuable painting but still displaying it in your home).
  • You can give away larger sums under the Potentially Exempt Transfer (PET) rules – but you have to survive for a further seven years for the transfer be 100% IHT-free. Taper relief can reduce the IHT rate if, sadly, you do not survive seven years.
  • Consider a lifetime trust – IHT does not become liable until the death of the surviving partner. But you will need expert legal advice.
  • Giving money to charity can reduce the IHT rate on your entire estate – your loved ones would see more money if you were to give 10% of your estate to charity (rather than 8%).

Take legal advice and act quickly (but not hastily). Otherwise you risk this…


What Inheritance Tax Could Cost You On Average

Here’s the reality. Inheritance Tax is a worry that hangs heavy on the South of England. There is very much a North-South divide when it comes to IHT.

And the number of families facing IHT is likely to rise significantly as the Chancellor tries to find ways to pay for Britain’s soaring coronavirus bill (£339 billion, according to the Institute for Government think tank).

And it’s the South that’s bearing the brunt. Some 64% of estates hit by IHT were in the South East, South West, London and the East of England, according to research from insurer NFU Mutual.

In the South West (which includes Bournemouth, Poole, Christchurch and Dorset):

  • 2,590 estates were liable for IHT
  • the average IHT bill was £202,316.

In the South East (which includes the New Forest):

  • 4,930 estates were liable for IHT
  • the average IHT bill was £215,010.


There’s No Easy Way To Say This: IHT Is A Tax On The Middle Classes

Here’s the uncomfortable truth: IHT hits middle-class families disproportionately hard. That’s because

  • very rich families are so wealthy that they can afford to give assets away without feeling the pinch
  • families on more modest incomes pay no IHT because they’re covered by the nil-rate bands.

So only 3.7% of UK estates ever end up paying IHT. But that’s no comfort when it’s yours…and the other 96.3% pay nothing.

Worried that you could be facing an IHT liability at some point in the future? We strongly recommend that you get in touch now. We can suggest the best ways to remove or reduce that burden.


Further Reading

There’s an old saying: ‘don’t let the tax tail wag the investment dog’. You’ll hear it more from independent financial advisers and wealth managers but it applies equally to your will and your estate.

It’s important to think about IHT, your will and your estate in a wider, holistic context – about how all this applies to you and your family circumstances. You’ll find lots of detailed information here on wills, probate, Inheritance Tax planning, contested wills, powers of attorney, care home funding, trusts and charities

You may also find these blog posts useful:

  • Changing A Will After A Person Has Died – read more…
  • Will Your Trust Backfire And Cost You Thousands Of Pounds? – read more…
  • Registering Trusts: How The Latest New Rules Will Affect You – read more…


Get Expert Legal Advice On Inheritance Tax

Inheritance Tax planning is done best when started soonest. Get expert legal advice from Coles Miller Partner Anthony Weber, a specialist wills and probate solicitor based at the Broadstone office.