If marriage is not on the cards, what can you do to protect your estate?

We recently wrote about the misconception of the “common law spouse” and the importance of putting a will in place to ensure your assets are passed on as you wish. In this article, we  consider how couples who do not wish to get married can mitigate their inheritance tax (IHT) exposure upon death.

Cohabiting couples are the fastest growing family type in the UK. It is important that this growing group is aware of the IHT and estate planning tools that can be used to plan for their future

Married vs unmarried couples

Basically, IHT is charged on an individual’s estate on death at the rate of 40%. Each individual enjoys a nil-rate band amount which is taxed at 0%. The nil-rate band is currently £325,000 (less any gifts made in the seven years before death), so if you die leaving a £400,000 estate and have a full unused nil-rate band, IHT is charged at 40% on the £75,000 excess (assuming the additional IHT allowance “the residence nil rate band”, which is currently £175,000, is not available).

The principal IHT benefit available to married couples is the spouse exemption. This allows one spouse to leave their entire estate to the other spouse free of IHT. In addition, any unused nil-rate band and residence nil rate band (if applicable) are transferrable between spouses. Therefore, on the first death a surviving spouse can inherit tax-free and then potentially enjoy IHT allowances of up to £1 million when they subsequently die.

However, unmarried couples do not have the same IHT benefits as their married counterparts.  There is no spouse exemption, and the unused nil rate band and residence nil rate band (if applicable) are not transferable between an unmarried couple.

Option 1: Will trusts

You could consider using a trust created by your will to ensure your chosen ultimate beneficiaries inherit your assets as you intend. For instance, you may have children, but would want your partner to be able to live in the house you own together.  A trust structure would allow your partner to be able to continue living at the property whilst protecting the underlying capital for the benefit of your children.  It would also stop the value of the assets you would like your partner to benefit from potentially aggregating with their own estate and IHT being paid twice i.e. on your death and then on your partner’s subsequent death.

Option 2: Purchase life assurance

In consultation with your financial adviser, if you do not want to enter into a marriage or civil partnership, purchasing life assurance and placing it in trust for the benefit of your partner (and/or children) can be a useful tax planning tool. By placing the benefit of the policy in trust, the policy would not pay into your estate on death and would therefore not be subject to IHT. On your death, the trustees of the trust would pay the proceeds to your nominated beneficiaries.

Option 3: Tax efficient investments

Your financial adviser will be able to advise you on tax-efficient investments designed to mitigate your IHT exposure by investing in assets that are taxed at 0% on death, therefore reducing the IHT payable on your death.

Option 4: Consider a civil partnership

The above options do not constitute legal or financial advice and, as each individual’s circumstances vary, we suggest you take advice on the options available to you. If you require advice about your estate planning matters, please contact info@ts-p.co.uk