Unmarried couples and inheritance tax

 

Inheritance tax is levied on gifts at rates of 20% or 40%; the former rate applying to lifetime gifts and the latter to gifts made on death. An individual is entitled to various reliefs and exemptions including a nil rate band (NRB) worth £325,000 and a residence nil rate band (RNRB) worth £150,000 (for the tax year 2019/20, rising to £175,000 for the tax year 2020/21).

 

Married couples are often able to avail themselves of planning opportunities not available to the unmarried couple. For example, assets can be transferred between spouses without precipitating a capital gains tax charge, but not between unmarried couples; some (but not all) married couples have their own allowance, the married couples allowance; and married couples who each own a different percentage of a rental property (e.g. 80:20) may still agree to be subject to income tax as if each received 50% of the rental income.

 

Unfortunately for the unmarried couple, disadvantages continue for inheritance tax purposes.

 

The key issue relates to the inability of the unmarried couple to transfer between them any unused elements of the nil rate band (NRB) and residence NRB (RNRB). There is, as a consequence, a serious risk that full advantage of both these reliefs may not be feasible and any inheritance tax charges will be greater than they might otherwise be.

 

This would occur in the following circumstances. If on death in 2020/21 the estate (£400,000) of one spouse falls below the aggregate of the NRB (£325,000) and RNRB (£175,000) but the estate (£600,000) of the other spouse exceeds such aggregate, the former spouse’s unused element of the NRB (£175,000 + £325,000 - £400,000 = £100,000) cannot be transferred to the other spouse to be utilised. In short, £100,000 of the combined NRB and RNRB is wasted.

 

If the spouses had been married, the £100,000 unused elements of the NRB could simply have been transferred from one spouse to the other, saving £40,000 of inheritance tax.

 

With regard to the RNRB, it is only available where on death a parent leaves their interest in the residence (broadly, family home) to a lineal descendant (e.g. children (including stepchildren, grandchildren). 

 

In the case of an unmarried couple a child of one of the couples but not the other means that the latter is not able to take advantage of the RNRB.

 

The inter-spouse exemption permits gifts between spouses without any inheritance tax charge. Unfortunately, it is unavailable to gifts between members of an unmarried couple. 

 

Business property relief (BPR) extends to 50% or 100%, depending upon the type of relevant business property. For example, in the case of land, BPR at 50% is available if the land is owned by a spouse and used by the company which is controlled by that spouse. 

 

However, if one spouse (S1) owned (say) 40% and the other spouse (S2) owned (say) 11%, S1 is treated as owning their 40% plus the other 11% thus controlling the company and obtaining BPR.

 

However, if S1 and S2 were an unmarried couple, shareholding aggregation would not apply and no BPR on the land would be available.

 

There is little doubt that unmarried couples are at a significant disadvantage with respect to mitigating any exposure to inheritance tax.

 

In view of the increased risk of exposure to inheritance tax for the unmarried couple consideration should be given to each party taking out life insurance to cover any potential inheritance tax charge arising on death.