2020 is a leap year. Legend says that St Patrick decreed that ladies could propose on the one extra day in February. Increasing your inheritance tax allowances is not the most romantic reason to get married or enter into a civil partnership but it is certainly well worth your consideration. One of my colleagues was recently making wills for 90 year old clients who had been sweethearts for 70 years. When asked why they had not married they said “they just had not got round to it”. When she advised them of the inheritance tax consequences of dying whilst unmarried they quickly made arrangements and she was an honoured guest at their wedding.. Ken Dodd reportedly had the last laugh and saved £2.6 million in inheritance tax when he married his long term partner 2 days before his death.
Ken Dodd’s marriage highlights the current gap between the ways that a “common law partner” and a legally joined spouse or civil partner are treated for inheritance tax purposes. A surviving spouse or civil partner may inherit the entire estate of their spouse or civil partner without incurring any inheritance tax charge. If they inherit the whole estate of their spouse or civil partner then they also inherit additional inheritance tax allowances so that on their subsequent death they have their own inheritance tax allowance (currently £325,000) and that of their deceased spouse or civil partner (currently £325,000) to offset against the inheritance tax payable by their estate.
If we look at an example we can see how this works. Fred and Rose have lived together for 40 years. Fred dies leaving his £400,000 in savings to Rose. Fred’s estate pays inheritance tax of £30,000 and Rose receives £370,000. When Rose subsequently dies she has her own inheritance tax allowance of £325,000 to set against the £370,000 in savings meaning that her estate will pay a further £18,000 in inheritance tax. The total inheritance tax bill for Fred and Rose as “common law partners” is £48,000.
If on the other hand Fred and Rose were married then Fred could pass all his savings to Rose on his death without any inheritance tax liability. Rose will consequently inherit £400,000. When she subsequently dies she has her own inheritance tax allowance of £325,000 and Fred’s inheritance tax allowance of the same amount meaning that her estate will pay no inheritance tax at all. An inheritance tax saving of £48,000.
Since 2017 a residence nil rate allowance has been introduced to save inheritance tax currently giving persons with “direct descendants” an additional £150,000 inheritance tax allowance in certain circumstances. Married couples and civil partners can transfer their unused residence nil rate allowance to their surviving spouse or civil partner if certain conditions are met giving the surviving spouse or civil partner an additional £150,000 inheritance tax allowance. This residence nil rate allowance is not transferable if you are “common law partners”
The additional inheritance tax allowances that surviving spouses or civil partners may inherit can save £190,000 in inheritance tax (rising to £200,000 in April).. Persuaded yet to propose on February 29th? If you would like advices about wills, inheritance tax or the administration of estates then please do contact us.