In this day and age, around half the marriageable population co-habits; they raise families, and conduct their business and financial affairs as if married. The tax system is definitely skewed towards married couples or civil partners (included in the text as ‘married’), with more generous tax breaks than single people.
Many people consider themselves as ‘common law’ husbands or wives, where they are co-habitees – but there is no such legal status in the UK. You are either married (or civil partners) or single. If co-habiting, they are two single people with single people rights; however, in many instances they have married people responsibilities - especially where children are born of the relationship.
Inheritance Tax Planning
Every individual enjoys the inheritance tax (IHT) ‘nil rate band’ of £325,000 as an IHT-free part of their estate. Only married couples have the spouse exemption (all assets left to the spouse are generally 100% free of IHT in your estate); and any unused portion of the nil rate band is only transferable between married spouses on the death of one of them. So if you have cohabited for 30 years and leave your estate to your partner in your will and then to your children, after your nil rate band deduction of £325,000 the balance is fully subject to IHT. If your co-habiting partner dies first, when you die later the assets passing to your children will also be fully subject to IHT, after your nil rate band is deducted. You cannot use the unused portion of your partner’s nil rate band, nor benefit from the spouse exemption.
Spouses also enjoy an exemption from IHT and capital gains tax (CGT) where they can pass assets to each other without being taxed. Unmarried partners making lifetime gifts to each other will be subject to the PET (‘Potentially exempt transfer’ rules), where the donor must survive for seven years for the gift to fall outside his estate. Also if the asset gifted has made a gain then CGT may be payable, whereas this is not the case if married.
Tax Tip 1
If gifting assets to each other, take out ‘gift inter vivos’ insurance cover – this is 7 year specific decreasing term. A 42 year old male making a gift to his partner of £150,000 could have an IHT liability on death of £60,000. The premium can be only £5.58 per month to cover this liability.
If you do not have a Will
The rules of intestacy determine succession. If you do not have a will then these rules are harsh on a surviving unmarried partner, and you will not inherit at all. Your children can inherit as the definition of a child includes one born in or out of wedlock, and legally adopted children, but not step-children. If no children, your partner’s assets go to his or her parents, or brothers and sisters and remoter issue.
All is not lost though, as you may have a claim under the Inheritance (Provision for Family Dependants) Act 1975 which allows the survivor of a cohabiting partnership to apply to the Court for reasonable maintenance - also the Law Reform (Succession) Act 1995 allows for an application for maintenance. However, maintenance is very different from inheriting assets.
Tax Tip 2
To protect yourself make sure that you have valid wills in place. Failure to do so – even though the intention of the partners is to benefit one another equally on death – could mean that you are disinherited. In a will you can leave your assets to whomever you wish. You can set up trusts for children and elderly parents and direct how your assets will devolve on your death. Divorce and remarriage will revoke your will. Check that your wills are valid at all times. Possibly the best tax tip is to get married....but there again...!
Another useful tip is to ensure that there is a ‘letter of wishes’ for your pension fund benefits on death, directing where you would like your pension benefits to go on your death. Most pension funds leave benefits to a spouse only (unless advised otherwise). Get it in writing that your pension benefits will devolve as you wish them to, and inform the trustees that you are not married but wish your pension benefits to go to your partner and children. But always seek advice from an experienced professional adviser in this area.
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