Unmarried couples and protecting your assets - how we can help you.

IHT position for couples in marriage or civil partnership

Married couples and couples who have entered into a civil partnership benefit from further Inheritance Tax (“IHT”) allowances than unmarried couples. On our passing, each of us has an IHT allowance called the Nil Rate Band (“NRB”) of £325,000. Only assets exceeding this threshold are subject to IHT at 40%.

If you leave your estate to your surviving spouse or civil partner no IHT is payable by virtue of ‘Spouse or Civil Partner Exemption’, meaning your NRB allowance remains unused. When the survivor dies this unused NRB can be rolled over to the second to die’s estate, taking the total allowance to £650,000.

Additionally, if you leave your main residence to your children, you may be able to claim a further IHT allowance called the Residence Nil Rate Band (“RNRB”) of £175,000. Again, this can be rolled over to the survivor’s estate, providing a potential total allowance for couples who are married or in a civil partnership of £1 million.

There can be a misconception that unmarried and cohabiting couples can qualify for the above reliefs on the basis that they have acquired a “common law marriage”. However, this is not a recognised legal status under the law in England and Wales. From an IHT perspective, cohabiting couples unfortunately do not qualify for Spouse / Civil Partner Exemption or transferrable IHT allowances.

The tax position for unmarried couples

Many couples are now choosing not to marry; what implications might this have on their estate from an Inheritance Tax perspective?

Assets you leave to your partner exceeding your Nil Rate Band will be subject to IHT at 40%. Depending on how you structure your will, you may be able to claim the RNRB on assets you leave to your children.

Consequently, leaving your estate to your partner may leave them with a substantial IHT bill due to the limited availability of allowances. In this situation, one option that may help in retaining flexibility in how the division of your estate is dealt with is by leaving your estate on a Discretionary Trust in your Will.

What is a Discretionary Trust?

You will appoint trustees who administer your estate and have discretion in using their powers for your chosen beneficiaries. A Discretionary Trust can be useful:

1. Firstly, from a tax perspective and ensuring the Trustees can utilise the available allowances and use the assets in the estate in the most tax efficient way.
2. Secondly the trust can help maintain control over the division of the estate and provide flexibility for your loved ones in light of any changes to legislation or circumstances.

A letter of wishes runs supplementary to the trust, detailing how you would like your estate to be distributed. This can be updated any time without changing your will. You should obtain advice on the cost and tax implications of setting up and running a Discretionary Trust and this advice will be tailored to your estate and circumstances.

What powers do Trustees have?

Although trustees do have wide powers, all decisions must be made unanimously in accordance with your letter of wishes. One of the main powers Trustees have is to appoint out the income or capital from your estate for the benefit of your beneficiaries. This might, for example, be used to support them with living, education and medical costs.

How do I find out whether Discretionary Trust is right for me?

If you would like to explore your options, please contact a member of our team on 020 8290 0440 who will be happy to provide you with tailored advice.