Till death do us part- the inheritance position for unmarried couples and cohabitees

By not having a Will there is a distinct possibility that your Estate could end up passing to the wrong people and not to the people you would have wanted to benefit. For example, if you are living with a long term partner but are unmarried or not in a civil partnership then your partner has no automatic right to inherit under the Intestacy Rules.

This is particularly problematic if one of you is financially dependant upon the other or the family home is only on one person’s name. In that instance the partner could seek to bring a claim for provision to be made for them from the Estate under the Provision for Family and Dependants Act 1975. However, to bring a claim would take a great amount of time and cost with no guarantee that they will receive anything at the end of the process. Not to mention the emotional stress and strain of having to bring legal action against a loved one’s estate.

A cohabitee who brings a claim under the Act is more likely to receive a right of residence to live within the property of the deceased for a set period of time or on the basis that certain conditions are abided to, rather than a lump sum payment. The cohabitee would be permitted to live within the property, have to maintain all the outgoings of the property but would not necessarily hold any legal entitlement to it. If the deceased had made a valid Will then the cohabitee could have been gifted the property or a portion of the property outright. Anything that a Partner/Cohabitee will receive under the 1975 Act will likely be less than what they could have received under the terms of a Will. A comprehensively drafted Will ensures that your estate reaches the right people in the right way.

Tax Position

There are additional tax benefits for married couples that are not available to unmarried couples. A workable example of how the reliefs work is detailed below.

Nil-Rate Band

On death, each individual has a ‘nil-rate band’ of £325,000. This means that when their estate is valued, the first £325,000 is taxed at 0%. Any value over and above that (which does not qualify for an exemption or relief) is taxed at 40%.

When a person who is married dies and leaves their estate fully to their spouse, the entire value is covered by spouse exemption and is free from Inheritance Tax. This means that the person who has died has not used their nil-rate band and it therefore passes on to their spouse.

On the spouse’s death, the starting point is then a nil-rate band of £650,000.

 This doubling up of the nil-rate band is unavailable to an unmarried couple and their estate would be viewed as each partner having one separate nil-rate band of £325,000. As opposed to the combined £650,000.

Even if the entirety of the Estate is left to the surviving partner the tax is not capable of being deferred by virtue of spousal exemption and tax would be payable at 40% on first death of on any of the deceased’s sole assets that exceeded the £325,000 threshold.

 

Residence Nil-Rate Band (RNRB)

This is an additional nil-rate allowance which applies to a property in a person’s estate that they have lived in at some time (not necessarily the current family home) and is inherited by children or grandchildren.

At the moment the RNRB is £175,000 per person, and again will pass to a surviving spouse if the first spouse does not use it. It will not transfer between a couple who are not married or in a civil partnership.

It is worth mentioning that there are a few other key conditions that must be satisfied to claim the RNRB. However, these only come into play if your estate is less than 2 million pounds.

 

  1. Married couple who leave their estates to each other and then to their children on second death

 

The couple can combine their available nil-rate bands and RNRB’s to give them the following combined available tax relief:

 

  • Wife’s Nil Rate Band – £325,000
  • Husband’s Nil Rate Band – £325,000
  • Wife’s RNRB – £175,000
  • Husband’s RNRB – £175,000

Total combined available inheritance tax relief – £1,000,000

 

In this scenario the couple would receive spousal exemption on the estate on first death, and provided the combined estate does not exceed the available tax relief there will be no tax to pay on second death.

 

  1. Unmarried couple who leave their estates to each other and then to their children on second death

 

The unmarried couple will not be able to claim the spouse exemption and can only claim RNRB on the death of the survivor when the property passes down to the children.

 

  • Partner 1 Nil Rate Band – £325,000
  • Partner 1 RNRB – £0.00

 

Total available inheritance tax relief – £325,000  – but this will be used passing assets to the surviving partner. Meaning that on second death, Partner 2 has the combined estate but only the following reliefs –

 

  • Partner 2 Nil Rate Band – £325,000
  • Partner 2 RNRB – £175,000

Combined relief – £500,000

 

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