Inheritance tax considerations for unmarried couples

With an increasing number of couples choosing not to get married and simply live together instead, it remains very common for such couples to misunderstand the inheritance tax (IHT) rules which will apply to them on death. Unmarried couples often assume that they will benefit from the same IHT exemptions and allowances afforded to married couples and those in a civil partnership. However, that is simply not the case.

Every person has an IHT allowance, known as the nil rate band (NRB), which is currently set at £325,000. On death, IHT is generally payable at 40% on the value of assets in excess of the NRB. There is also an additional allowance, known as the residence nil rate band (RNRB), which applies where a person’s main residence is left to their direct descendants. The RNRB currently stands at £175,000 per person.

For married couples, one of the most useful exemptions is the spouse exemption which allows assets, whatever their value, to pass between spouses free of IHT. For example, where the first of a married couple dies, leaving their estate to the surviving spouse, there will be no IHT to pay on the first death as the spouse exemption will apply. This also means that the NRB and the RNRB of the first spouse will remain unused so that these allowances may be transferred to the estate of the second spouse, thereby potentially doubling the available allowances.

A married couple could therefore potentially benefit from a combined IHT allowance of £1m, combining both their NRB allowances and their RNRB allowances. Where the value of a married couple’s combined estate is less than £1m this generally means that there is no IHT to pay.

Compare this to an unmarried couple where, when the first of them dies, all assets are left to the surviving partner. The spouse exemption will not be available and so the NRB will be applied to the value of the estate. If the value of the estate exceeds the NRB, then the excess will be taxed at 40%. The IHT will be payable before the estate passes to the surviving partner.

When the second partner dies, their NRB will be applied to the value of their estate (and their RNRB if the estate includes a main residence passing to direct descendants). There will be no NRB or RNRB transferable from the estate of the first partner to die as the transferable allowances do not apply to unmarried couples. There is, therefore, a very real possibility that unmarried couples could face double taxation with assets being charged to IHT on the first death and then again on the second death.

To reduce any potential IHT liability, unmarried couples could consider getting married to ensure that they can benefit from the spouse exemption and transferable NRB and RNRB. However, for those couples who do not wish to marry as a tax planning step, they should certainly seek advice so that they are clear on the IHT implications of their situation. They should also seriously consider making wills which, if carefully drafted, could potentially reduce the likely IHT.