(The use of the word married is used simply for ease – it can be used interchangeably with civil partnerships – the tax law being discussed applies to both).
Time and time again we will sit opposite clients and explain to them what the effect of being married has on the amount of Inheritance Tax (IHT) their Estate will be subject to.
Many are aware that something rather special happens for people who are married but they don’t always know exactly what. This blog attempts to give a window into that conversation – but of course this is not a substitute for actual legal advice.
It has occurred to me that even if a couple don’t believe in the concept of marriage, the financial implications may, for some, be enough to persuade them that it’s something to seriously consider (although that might be the cynic in me).
For many couples the plan is to leave most of their Estate to their partner. When a married person does this they take advantage of the spousal exemption on Inheritance Tax which means that an Estate passing to a person’s spouse is NOT subject to Inheritance Tax. However this exemption is very specific that the couple must be married (or CP) – simply living together, or referring to oneself as ‘common law married’, or even having children together, does not give rise to this exemption.
The concern that I am sure many unmarried people have, is that worryingly the family home may have to be sold to pay the tax bill, whereas a spouse can rest assured that they can remain in their own home – a huge relief, especially if there are children or dependents within the household.
Inheritance Tax is only paid on the value of the Estate exceeding £325,000 (known as the Nil Rate Band of ‘NRB’). Any amount over this is subject to a tax at 40% (there is a way to reduce this to 36% when a percentage of the Estate is left to charity).
What makes the spousal exemption even more advantageous is that any unused NRB, or unused part of it, can be transferred to the surviving spouse. So if a married couple leave all their estates to each other on the first death not only is there no IHT is due upon the death of the first spouse, but because of the spouse exemption the first person is not considered to have used their NRB when they passed their Estate to their partner, leaving all of it available to transfer. On current rates this would mean £650,000 can pass free of IHT on the second death due to the transfer of the spouses unused NRB.
Things may become even more advantageous for married couples from April 2017 when an additional relief is being added known as the Residential Nil Rate Band. This was announced in the summer 2015 Budget and is an attempt to allow direct descendants (i.e. children and grandchildren) to benefit from paying less IHT if they are inheriting the Family home. From April 2017 there is an additional £100,000 on top of the current NRB, which will increase annually until the tax year 2020-2021 when it will be £175,000. This will mean that potentially married couples may be able to pass on up to £1,000,000 of their Estate without being subject to IHT. We would stress that this does depend on the terms of the will, the assets of the estate and the beneficiaries. As with everything here, we would recommend that you book an appointment with one of our solicitors to discuss your estate planning needs.
I sincerely hope that the contents of this blog won’t be featuring in any conversation you may have with a certain significant other whilst you’re on bended knee….but I do hope you found it useful.
For more information please contact our Wills, Probate and Trusts department at Hanne on 0207 228 0017 or email us at email@example.com
By Michael Brierley, Solicitor