News & Views

Co-habitation- it can make you poorer


Beyond the stark warnings of the recent BBC article  highlighting the challenges faced by unmarried couples in life, they are also at a serious tax disadvantage post death both in terms of how the estate is shared if their partner dies without leaving a Will (they have no automatic claim on assets solely owned by their partner and have to make a formal claim, potentially to the Court), but also in terms of inheritance tax.

Inheritance tax can be a major problem for cohabiting couples. Cohabitees with property and other assets with a combined value of more than £650,000 face an inheritance tax (IHT) charge if one party dies.  This is because unmarried partners can only pass assets up to the value of the nil-rate band of £325,000 free from the imposition of inheritance tax.  Everything that passes from one partner to the other above that sum is taxed at 40% of that value.

Compare this with anything left to a spouse or civil partner which is 100% exempt from inheritance tax.  In addition, the surviving spouse/civil partner can “inherit” the other party’s nil-rate band, meaning the full £650,000 can pass to other beneficiaries such as children on the death of the second spouse/ civil partner.  This transfer of the nil rate band is not available to unmarried couples.

In addition, the new Residence Nil Rate Band, potentially giving married couples and civil partners an additional exemption of up to £200,000  on the second death, is not available  to cohabitees passing assets to their children.

So be warned, and act early. Things can be done to reduce the negative impact.  It is important for everyone to make a will and make arrangements to be as tax efficient as possible but it is imperative for non-married partners to get their affairs in order – or maybe this Blog will lead to a number of hasty proposals?  A word to the wise though – do not mention inheritance tax planning advantages during the course of the proposal!

Sherrards’ Private Client Team are here to help with Wills, lasting powers of attorney, inheritance tax planning, pre-nuptial agreements, co-habitation agreements and mediation.

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