Although marriage is often seen as a personal commitment, it can also be a practical financial arrangement. This is especially true when considering inheritance tax.
The legal distinction between married and unmarried couples has significant consequences when it comes to estate planning. This article examines whether entering into a marriage or civil partnership could be a strategic step to mitigate inheritance tax liabilities and safeguard assets for future generations.
What is Inheritance Tax?
Inheritance tax is a tax on the estate, which includes property, money, and possessions, of someone who has died. In the UK, it is usually charged at 40% on the estate’s value above the £325,000 threshold. This threshold is called the nil-rate band. An additional allowance of £175,000 may apply if you leave your main residence to direct descendants. This is known as the Main Residence Nil Rate Band and applies only if certain conditions are met.
Inheritance Tax for Married Couples and Civil Partners
Everything you leave to your spouse has the benefit of 100% spousal exemption from paying inheritance tax, regardless of value.
Any unused tax free allowance can be transferred to your spouse when you die – therefore if you leave everything to each other when you die on second death you potentially have doubled the threshold to £650,000.
When leaving the family home to children or grandchildren on second death, a married couple has a combined main residence nil-rate band of £350,000, which provides for a total potential tax-free estate of up to £1 million.
Inheritance Tax for Cohabiting Couples
If you’re in a long-term relationship, sharing a home, finances, and possibly raising children together, you might assume your legal and financial standing mirrors that of a married couple. When it comes to inheritance tax, cohabiting couples are treated very differently, and often to their detriment.
Unlike married couples, your partner may not receive anything automatically from your estate unless you name them explicitly in your Will. Even married couples are advised to make Wills. This is because there is no guarantee that a person’s entire estate passes to their spouse. It depends on family circumstances and the value of the estate.
Even if you have completed a Will and the surviving partner inherits everything the main residence nil rate band isn’t then available on their death This means they would be charged inheritance tax on anything above threshold.
Without marriage, the surviving partner can’t inherit unused tax-free allowances, unlike spouses.
That means if you leave your entire estate to your partner and you’re not married, or in a civil partnership, there could be a hefty tax bill. This could potentially mean assets like the family home might have to be sold to pay it.
In other words, married couples can pass on wealth much more efficiently as the exemptions available to them do not apply to long-term cohabiting partners, no matter how committed or interdependent they are.
If I am excluded from a Will, what can a Court award me under the Inheritance (Provision for Family and Dependants) Act 1975 Act?
A blog by Stacie Hurt.
Once the Court has considered all the various relevant factors to an applicant’s 1975 Act claim, the Court could conclude that they believe that the Will or Intestacy Rules does make “reasonable financial provision” for the applicant, and the applicant could lose their claim (and potentially be liable for the other sides costs, as well as their own).
Is Marriage a Smart Financial Strategy?
If your main concern is safeguarding your estate and reducing tax liabilities for your partner and children, marriage may offer significant financial protection. Many families now consider asset protection as part of their estate planning. Including common methods, such as trusts relating to your property, within your will can create tax traps for unmarried couples. This means some options may not be available to you. As a result, your estate might lack the protection you want when balancing provision for a partner and the next generation.
However, Marriage is a legal contract with implications for property, debt, and future inheritance. If the relationship breaks down, divorce can be financially and emotionally draining and assets are more difficult to separate. Solicitors specialising in divorce and those specialising in probate matters will have very different and often opposing views on the merits of marriage.
It may also feel uncomfortable/unromantic marrying primarily for tax reasons.
Inheritance Tax FAQs
Yes. Marriage allows spouses to transfer any unused inheritance tax allowances to each other upon death. This means the surviving spouse can potentially inherit up to twice the individual tax-free threshold before inheritance tax applies, significantly reducing the overall tax liability on the estate.
Civil partners receive the same inheritance tax benefits as married couples. They benefit from a 100% exemption on assets passed between partners and can transfer any unused nil-rate band allowance to the surviving partner, unlike unmarried couples who don’t receive these protections under current law.
Cohabiting couples without marriage or civil partnership do not benefit from spousal exemptions or the ability to transfer unused allowances. Therefore, they could face inheritance tax bills and the death of the first of them, which may result in assets needing to be sold to cover the tax a consideration not faced by married couples.
The nil-rate band is the amount—currently £325,000—that an individual can pass on without paying inheritance tax. Married couples can combine their individual nil-rate bands, meaning a combined threshold of up to £650,000 can be passed on tax-free, helping to protect more of their estate from inheritance tax.
Yes. The Main Residence Nil Rate Band offers an additional allowance, currently up to £175,000, when a main home is left to direct descendants such as children or grandchildren. This allowance is added to the standard nil-rate band, further reducing the taxable value of the estate.
Should I buy a hat?
In conclusion, getting married for Inheritance Tax savings can be worth it if it aligns with your personal and legal goals. For committed couples who already share their lives and assets it can provide protection and peace of mind. But marriage is more than a tax decision. Before making this decision discuss this with your advisors (both legal and financial) and ultimately decide if it works for you on a personal level.
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