04 September 2020
Unmarried couples are treated completely differently to married couples and civil partners for tax purposes.
Unmarried couples who live together are sometimes known as “cohabitees”. However, if you are not married or in a civil partnership; your relationship is not recognised for tax purposes.
Example 1: Gina Aldridge and Amy Brownlee live together as a couple for 20 years. They are cohabittees. Their relationship is not recognised for tax purposes.
Example 1 continued: Gina and Amy enter into a civil partnership in 2018. They become known as Ms G. & Ms A. Aldridge-Brownlee. Their relationship is now recognised for tax purposes.
Getting formal recognition of your relationship can completely alter the way the inheritance you leave is treated for tax purposes.
When a person makes a gift to their spouse or civil partner it is a tax-free transfer due to “spouse exemption”. So you can leave any amount of money to your spouse or civil partner under your Will and it will be paid to them without your Estate incurring an Inheritance tax liability.
However, if you make a gift to a partner to whom you are not married or in a civil partnership then your Estate may have to pay Inheritance tax.
When a person dies, their Executors value their Estate (including assets held with another person) and determine whether the net value is above the “Nil Rate Band” limit of £325,000. The first £325,000 of a person’s Estate is taxed at 0%. This means that there is no tax to be paid. However, if the Estate exceeds that level tax will be incurred at 40%. That’s right FORTY PER CENT.
Example 2: Gina dies in 2017 (before the civil partnership) leaving an Estate of £500,000. Her Will leaves everything to Amy. The first £325,000 of the Estate is tax-free. There is a tax liability of £70,000. Amy inherits £430,000.
Example 2 continued: However if Gina dies in 2019 (after the civil partnership) there will no tax liability because her civil partner will inherit with the benefit of spouse exemption. Amy inherits the whole £500,000.
Is this different treatment of unmarried couples discriminatory? Yes. This is a point being considered by parliament in the Inheritance (Cohabitants) Bill. However legislation has yet to be drafted which adequately covers the situation.
In the meantime, you may want to consider a civil partnership or getting married as a way to avoid a significant tax liability. Whilst it is not the most romantic reason to get married, it is a practical step to avoid a potential tax problem in the long term.
If you would like advice on inheritance tax please contact our approachable and experienced Wills, Trust and Probate lawyers based at our Bournemouth and Christchurch offices. For advice on Pre-Nuptial Agreements please contact our friendly and knowledgeable family lawyers.
Please note, this is not legal advice. It is intended to provide information of general interest about current legal issues.
