Inheritance tax ‘unfair’ rules set to hit couples with 40% bill

Graham Southorn shares inheritance tax tips

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Inheritance tax is charged on the estate of someone who has died, typically at a rate of 40 percent. There is normally no inheritance tax to pay if a person passes their estate, amongst others, to a spouse or civil partner.

However, the current rules do not take into account the growing number of unmarried, cohabiting partners who do not benefit from the same IHT exemption. spoke to Michael Culver, chairman at Solicitors for the Elderly (SFE), who discussed the implications for non-married couples.

He explained: “People can sometimes mix up common law partners with civil partners and that’s where the terminology is unfortunate and confusing. 

“You are limited to either going through a civil partnership or getting married to be entitled to inheritance tax exemptions – which some will argue is antiquated and doesn’t fit with the world in 2022.

“While society doesn’t expect people to get married anymore, the inheritance tax measures force people into a traditional way of living.”

In order to receive the spousal exemption, people will need to be officially married or in a civil partnership to benefit.

A change in the law means both same-sex and opposite-sex couples can now obtain a civil partnership.

A common “myth”, Mr Culver added, is if couples are in a relationship for decades they may benefit from the same exemptions as those who are spouses – which is not true. 

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He added: “Unmarried couples could have lived together for 40 years, had children together and properties, but if one dies then there are implications.

“If a partner dies, all the other person in the couple will receive is £325,000 tax-free.

“The rest will be subject to a 40 percent hit, which will be a huge whack for many families. It’s outdated.”

However, the expert also said the problem with older rules also extends to the residence nil-rate band.

This exemption allows people to pass on their home to their direct descendants – children, adopted children, foster children, stepchildren or grandchildren, to increase a threshold from £325,000 to £500,000.

But for those who choose to, or cannot have children, the same benefits are not permitted when passing a home on to another relative or friend.

Mr Culver continued: “Similarly, the rules around the residence nil-rate band can also be confusing and feel somewhat unfair.

“This is because people who do not have children cannot benefit from the £1million allowance.

“The devil really is in the detail with this one, and it’s really important to be aware of the rules.”

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While the rules might create issues later down the line, they could also put pressure on cohabiting couples in the present.

Mr Culver concluded: “It might create issues such as deathbed marriages, due to the tax implications.

“I’ll always remember a proposal happening in my office after I unpacked tax rules for a couple – which can take the romance out a bit!

“But ultimately, once people are aware, they can start to make the decisions which are appropriate for them.”

Typically, all couples, but unmarried couples specifically, are urged to create a Last Will and Testament.

This document will clearly lay out a couple’s final wishes and how their estate should be dealt with.

Some may wish to speak with an independent financial adviser to find out more about the actions they can take. 

An HM Treasury spokesperson told “The vast majority of estates do not pay inheritance tax – more than 93 percent of estates are forecast to have zero inheritance tax liability in the coming years – however, the tax raises more than £6billion a year to help fund public services millions of us rely on daily.”

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