30th November 2022
general
Marriage is a big decision, and saving on tax is not the most romantic reason to propose. But if marriage is not on the agenda, it’s a good idea to understand how this affects your Inheritance Tax (IHT) position and plan accordingly.
Write a Will
It’s a common misconception that if you have an unmarried partner, that your assets will pass to them when you die.
The laws of intestacy are very clear and aim to distribute assets in a strict priority order to your family members. This could include children, parents, siblings, aunts, uncles, and cousins. It does not include partners or friends. Without a will, your assets could be passed to a distant relative that you haven’t spoken to in years instead of the partner you share your life with.
Writing a will ensures that your assets will be passed on to those you actually want to benefit.
You can also use your wills to maximise the IHT benefits available. Unlike married couples, co-habiting partners don’t have a transferable nil rate band. Any assets passing between partners will use up some of the nil rate band and potentially incur IHT. As the surviving partner will only have one nil rate band to use on second death, this could incur tax twice on the same assets and waste a valuable exemption.
Rather than have all of your assets pass between each other, you can both nominate other beneficiaries (for example, your children if you have them) to make use of both nil rate bands.
Set Up Trusts
Another option is to set up a trust, either during your lifetime, or via your will.
This allows you to ring-fence assets for your beneficiaries without giving them complete control. Your partner can be a beneficiary, as well as anyone else you nominate.
Setting up a trust during your lifetime can eventually remove the assets from your estate, although the value will still be assessed for IHT if you die within seven years. Discretionary trusts, which offer the greatest flexibility, may also incur entry, periodic, and exit charges if the value is over the nil rate band. It’s worth taking legal and tax advice.
Including a trust in your will means that your partner can benefit from your assets, without increasing the value of their own estate. This can help to mitigate the non-transferable nil rate band issue mentioned above.
Consider Investments Jointly
Many unmarried couples (and some married couples) choose to keep separate finances. Individual ownership of investments is fine (and in some cases preferable), but you should aim for transparency when planning as a couple.
Estate planning will be easier if your asset values are broadly equal. In some situations, it could be worth gifting assets to a partner. As well as making use of both partners’ nil rate bands, this can also help to maximise other tax benefits, such as ISA contributions, the personal savings allowance, dividend allowance, and capital gains exemptions.
Gifts of up to £3,000 per year and gifts from surplus income are immediately outside your estate. Larger gifts, even to a partner, remain in your estate for seven years. There may also be capital gains tax implications if you transfer assets to anyone other than a spouse.
It’s also worth noting that if you gift assets, you give up control. Even if you split up, your partner will still own the assets and can use them as they wish.
Have the Right Insurance
There are a number of reasons why you should have life cover in place. It might even be a good idea to have several policies for different purposes, for example:
In most cases, it’s worth setting up a trust for your life insurance benefits. This can make the claim process easier and avoids increasing the value of your estate.
Pass on Property Efficiently
If you own a main residence and wish to pass this on to your children, you may qualify for the Residence Nil Rate Band (RNRB). This extends the individual nil rate band by up to £175,000, or the value of the property if this is lower. The relief is gradually tapered away for estates valued at over £2 million.
The relief is not available if you pass the property to a partner. There may be ways around this, for example by owning the property as ‘tenants-in-common.’ This means you each have your own distinct share of the property to pass on to your own beneficiaries. Of course, this means that your partner could end up co-owning the property with your children, which brings its own set of complications, particularly if they want to continue living there.
If you own more than one property, and they have both been the main residence of one partner at some time or another, you may be able to apply each RNRB to a different property.
It’s a good idea to seek legal advice around property when you are writing your will.
Nominate Beneficiaries for Your Pension
Pensions are primarily designed to provide a retirement income, but they can also be a valuable estate planning tool. If you die before age 75, your pension can be passed on to your beneficiaries free of tax. If you die after age 75, your beneficiaries will pay income tax on any withdrawals they take. It can be efficient to spend your other assets first and keep your pension for your beneficiaries.
Pension death benefits are distributed by the pension trustees. They have discretion over this, but will normally follow your wishes. You can nominate your partner, or any other beneficiary you choose, to receive a share of your pension, free of IHT.
The UK tax and legal system has been designed around married couples, and unmarried partners miss out on many of the benefits. The easy answer is, of course, to get married, but it is not as simple as that if you are strongly against the idea. It’s a good idea to seek financial, tax, and legal advice to make sure that you are not disadvantaged.
Please don’t hesitate to contact a member of the team to find out more about estate planning.
