Unmarried Couple Property Owners Pay More Inheritance Tax

We have said this until we a ‘blue in the face’ and we repeat the message again for unmarried couples to take action before it is too late.

If you are not married or in a civil partnership and you jointly own a property and assets worth over £650,000, you could be in trouble and be forced to pay inheritance tax on 1^st death.

Basic Inheritance Tax Rules

• £325,000 nil rate band inheritance tax allowance for each person.
• £175,000 residential nil rate band for your share of property if passed down your immediate bloodline e.g., children and grandchildren of the blood or adopted.  This does not include step-children/step-grandchildren.
• £500,000 total potential inheritance tax free allowance per person.
• Gifts on death between legally married spouses and civil partners are IHT free meaning you have not used up any of your inheritance tax allowances if you leave everything to each other.  Your unused inheritance tax allowances up to £500,000 are then passed to your legal spouse/civil partner on death meaning they have £1m inheritance tax allowances on death.

Basic Property Ownership Rules

• Joint Tenants (most people) own property this way.  You jointly own the whole of the property.  On 1^st death your partner already owns the property and will continue to own it in their name after your death.
• Tenants in Common – many people sever joint tenants for IHT and care fees planning.  Imagine drawing a red line down the middle of your property.  You own half and your partner owns half.  Your separate wills then decide who inherits your share of the property on 1^st death.  You may gift your share back to your partner, you may gift your share to your bloodline children but give the right to your surviving partner under a life interest to live in your share of the property for the rest of their life rent free.  On 2^nd death, your beneficiaries then inherit your share, and your now deceased partner’s share of the property is dealt with by their will.

Example 1 - Unmarried Couple - Joint Tenants

You are an unmarried ‘common law’ couple that jointly own your own home worth £700,000, you are mortgage free and one of you dies.  You jointly own the home under ‘joint tenancy’ i.e., you both jointly own your own home as above.  You may have other wealth/savings/assets in joint names £50,000 or in your own names £50,000 each.  You have no debts.

• You die and your unmarried partner automatically owns the whole home under joint tenants.
• Your share of the value of the property must be included in your estate for inheritance tax calculations £350,000.
• Your share of the value of joint savings £50,000 must be included in your estate for inheritance tax calculations £25,000.
• Your savings in your own name only must be included in your estate for inheritance tax calculations £50,000.
• Total estate value for inheritance taxes = £425,000.
• You have not left your share of the property to blood line heirs, so you do not get the £175,000 Private Residence Relief on your property.
• You only have the £325,000 nil rate band IHT allowance.
• You can gift your own money (£50,000) to your unmarried partner, your children (if you have any) or any other as you see fit in your Will but IHT is payable.

40% inheritance tax is therefore payable on £100,000 (£425,000 estate less £325,000 IHT allowance) = £40,000 tax bill.

Example 2 - Unmarried Couple - Tenants in Common

You are an unmarried ‘common law’ couple, and you own your own home worth £700,000, you are mortgage free and one of you dies.  You each own 50% of your home under Tenants in Common (red line down middle) as defined above.  You may have other wealth/savings/assets in joint names £50,000 or in your own names £50,000 each.  You have no debts.

• You die and your unmarried partner already owns their 50% of the home under tenants in common.
• You already own 50% of the property in your name on death.
• Your share of the value of the property must be included in your estate for inheritance tax calculations £350,000.
• Your share of the value of joint savings £50,000 must be included in your estate for inheritance tax calculations £25,000.
• Your savings in your own name only must be included in your estate for inheritance tax calculations £50,000.
• Total estate value for inheritance taxes = £425,000.

Scenario A – You Have No Children (you may or may not have stepchildren via your partner)

• You cannot leave your share of the property to blood line heirs as you do not have any children, so you do not get the £175,000 Private Residence Relief on your property.
• You only have the £325,000 nil rate band IHT allowance.
• You can gift your own money (£50,000) to your unmarried partner, their children (if any are your stepchildren) or any other as you see fit in your Will.

40% inheritance tax is therefore payable on £100,000 (£425,000 estate less £325,000 IHT allowance) = £40,000 tax bill.  

Scenario B – You Have Children (you may or may not also have stepchildren via your partner)

• You can leave your share of the property to blood line heirs i.e., your children (not stepchildren), so you do get the £175,000 Private Residence Relief on your property.
• If you do not leave your share of the property to your blood line heirs (e.g., stepchildren, friends, other relatives), you do not get the £175,000 Private Residence Relief on your property.
• You still have the £325,000 nil rate band IHT allowance.
• You can gift your own money (£50,000) to you’re your children, your unmarried partner, their children (if any are your stepchildren) or any other as you see fit in your Will.

If you leave your share of the property to your bloodline heirs, you have £325,000 nil rate IHT allowance plus property allowance £175,000.  Total £500,000, no IHT is payable on your £425,000 estate.

If you do not leave your share of the property to your bloodline heirs you do not get the £175,000 private residence relief allowance.  40% inheritance tax is therefore still payable on £100,000 (£425,000 estate less £325,000 IHT allowance with no £175,000 property allowance) = £40,000 tax bill.

Others Areas of Interest for Unmarried Couples:

Read Cohabit Death Benefits  Watch Cohabiting Rights

IF YOU ARE NOT MARRIED/CIVIL PARTNERS, YOU NEED TO PLAN PROPERLY TO PROTECT ALL LOVED ONES ON DEATH.

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