UK Inheritance Tax rules give an enormous tax break to couples who are married or in a civil partnership.
Anything left by one UK spouse to another is exempt from Inheritance Tax with no limit.
This tax break does not apply to other couples.
The changes from the Budget last October will make the situation worse.
Do also remember that if an unmarried couple do not have Wills and one dies, the surviving partner has no legal right to inherit from their partner’s estate.
If one partner in an unmarried couple dies, his/her estate includes his/her share of any jointly owned assets (e.g. property and bank accounts).
If that partner has a Will leaving everything to the other partner only a maximum of £325,000 is exempt from Inheritance Tax. The value above £325,000 is taxed at 40%.
Currently, an unmarried partner’s pension and any death-in-service benefit from their employer is not taxed when they die.
From 6th April 2027, the Inheritance Tax position will get a lot worse.
From that date, pensions (except for final salary pensions) and death-in-service benefits will be subject to Inheritance Tax.
Take as an example, Simon and Jane.
They have Wills leaving everything to each other.
They have a house in joint names worth £500,000 with a £300,000 mortgage, joint savings of £50,000, life insurance to pay off the mortgage if one of them dies, and pensions worth £200,000 each.
If Simon dies before 6th April 2027, his estate for Inheritance Tax will be £425,000.
This is half of the equity in the house and half of the savings, plus all the life insurance money.
The first £325,000 is exempt from Inheritance Tax. The remaining £100,000 is taxed at 40%, giving a tax bill of £40,000 that will cost Jane almost all their savings.
If Simon dies on or after 6th April 2027, his £200,000 pension policy will be included for Inheritance Tax.
That means another £80,000 of Inheritance Tax. Jane will receive only £120,000 from Simon’s £200,000 pension.
That could severely affect Jane’s retirement plans and she may not be able to retire when she wants to.
So, what is the advice from me, as an expert in Wills and Inheritance Tax?
If you are an unmarried couple and want to inherit from each other, you must make Wills.
If you do not want to have to pay Inheritance Tax when one of you dies, you must get married or form a civil partnership.
However, there are other issues to consider that we do not have space for here.
If you are an unmarried couple, why not book a free initial appointment with me to discuss your own situation and the options available to you?
You can contact me by calling Monan Gozzett LLP on 01903 927055, or by email ssampson@monangozzett.com.
Appointments are available at our Arundel office, at your home, or by video call.
Please note that we are unable to offer free legal advice. Our client services team are here to take your case details and explain any costs involved
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Please note that we are unable to offer free legal advice. Our client services team are here to take your case details and explain any costs involved