With the number of individuals in the UK getting married forecasted to decline by 28% by 2050, unmarried couples living together are becoming an increasingly common part of modern-day romance.
Yet for all the shared homes, shared bank accounts and shared Netflix passwords, inheritance tax for unmarried couples is one area where the law draws a clear line. Unlike married couples, unmarried partners cannot share the same inheritance tax advantages.
Despite this, many couples do not realise the financial gap until it is too late. Whilst nothing says romance quite like discussing estate planning over dinner, it remains one of the most meaningful ways to protect the person you love.
What is inheritance tax and how does it affect me?
Inheritance tax is a tax payable on an individual’s estate when they pass away. Every individual benefits from a nil rate band allowance of £325,000, meaning assets below this threshold are taxed at 0%. Ordinarily, any value above the threshold is taxed at 40%.
Understanding how inheritance tax applies is particularly important for unmarried couples, as different rules apply depending on marital status.
Inheritance tax exemptions for married couples
When it comes to inheritance tax, the law clearly favours married couples. Gifts and assets left between spouses or civil partners are exempt from inheritance tax, regardless of value.
If one spouse leaves their entire estate to the other, no inheritance tax will be payable on the first death. In addition, any unused portion of the £325,000 nil rate band can be transferred to the surviving spouse, effectively doubling the allowance available on the second death.
Inheritance tax liability for unmarried couples
Inheritance tax for unmarried couples operates very differently. Where a couple is not married or in a civil partnership, assets left to a surviving partner which exceed the nil rate band of £325,000 will be subject to inheritance tax at 40%.
Crucially, any unused nil rate band cannot be transferred to the surviving partner. This can result in a significant and unexpected inheritance tax liability, particularly where property or other high-value assets are involved.
How about the residential nil rate band?
Some individuals may also benefit from the residential nil rate band, an additional inheritance tax allowance currently set at £175,000. This applies where an individual owns a property (or a share in one) that they have lived in and which is left to their direct descendants.
As with the standard nil rate band, the residential nil rate band can be transferred between spouses if it is not used on the first death. When combined, these transferable allowances mean that married couples could pass on assets worth up to £1 million before inheritance tax becomes payable.
Unmarried couples, however, cannot transfer the residential nil rate band, further widening the inheritance tax gap.
The solution: planning ahead
A straightforward way for unmarried couples to protect one another is to put properly drafted wills in place that accurately reflect their intentions.
Without a will, an individual’s estate is distributed under the rules of intestacy, and cohabiting partners have no automatic right to inherit. For unmarried couples who wish to make financial provision for a surviving partner, preparing valid wills is therefore essential.
Whether you are married, unmarried, or somewhere in between, thoughtful planning today can spare your partner unnecessary stress tomorrow. If you would like to understand how inheritance tax rules apply to your situation, explore your options, or put appropriate protections in place, now is the time to act.
We’re here to help
If you are part of an unmarried couple and want to ensure your partner is financially protected, our experienced Trusts and Estates solicitors can help you put the right plans in place. Speak to our team today to understand your options and avoid unnecessary inheritance tax liabilities.
Speak with a member of our team today, call us on 0800 118 1500 or complete our form below and somebody will be in touch with you.
Disclaimer
The contents of this blog or any other published by Talbots Law cannot be considered as legal advice. You should take no action without prior consultation with a qualified solicitor or legal professional. The contents of this blog refers to the process in England and Wales.
This blog was written by Molly King, Trainee Solicitor, in our Trusts & Estates team.
FAQ: Inheritance Tax for Unmarried Couples
Do unmarried couples pay inheritance tax in the UK?
Yes. Unmarried couples do not benefit from the inheritance tax exemptions available to married couples. Assets left to an unmarried partner above the £325,000 nil rate band are generally taxed at 40%.
Can unmarried couples transfer their inheritance tax allowance?
No. Unlike married couples, unmarried partners cannot transfer unused nil rate bands or residential nil rate bands to one another.
How can unmarried couples reduce inheritance tax?
Putting properly drafted wills in place is essential. In some cases, further inheritance tax planning may also help reduce liability, depending on the structure and value of the estate.