The Inheritance Tax Puzzle of an Unmarried Couple
Derek (68) and Susan (66) have lived together for 20 years but never married or formed a civil partnership. Derek owns the house they share (worth £450,000) in his sole name and has £300,000 in savings and investments. Susan has £40,000 in savings. Derek's will leaves everything to his adult son from a previous marriage. Derek assumes Susan will be 'looked after' because they are a couple, and believes inheritance tax will not apply because 'we're not married so there's nothing to tax'. Derek's estate is currently valued at £750,000 and he has made no lifetime gifts.
1. Explain the inheritance tax and estate-planning consequences of Derek and Susan not being married, and correct his misconceptions.
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Key misconception
- Derek believes being unmarried means 'nothing to tax'. The opposite is true: the spouse/civil partner exemption does not apply, so anything passing to Susan would be a chargeable transfer.
- His will leaves everything to his son, so Susan would inherit nothing - she has no automatic right to the house regardless of 20 years together. This is the most urgent issue.
IHT position
- Estate £750,000. The nil-rate band is £325,000 and the residence nil-rate band can add up to £175,000 where a main residence passes to direct descendants (his son qualifies).
- On those figures, up to £500,000 could be sheltered, leaving roughly £250,000 chargeable at 40% = £100,000, before any other reliefs. (Exact figures depend on the RNRB taper and available bands.)
- Because they are unmarried, no transferable nil-rate band and no spouse exemption protect Susan.
Estate-planning consequences
- Susan could be left homeless on Derek's death.
- Any gift to Susan during life would be a potentially exempt transfer that becomes chargeable if Derek dies within 7 years.
Correction: being unmarried increases, not removes, the tax and vulnerability.
2. Recommend practical steps Derek and Susan could take, weighing the options.
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Options
- Make a will - Derek should revise his will to provide for Susan, e.g. a life interest trust giving her the right to live in the house for life, with the remainder to his son. This protects Susan without disinheriting his son.
- Consider marriage or civil partnership - this would bring the spouse exemption (unlimited transfers between them) and the transferable nil-rate band, potentially eliminating much of the IHT. This is a personal decision, not purely financial, and should be presented neutrally.
- Review ownership of the home - transferring a share to Susan could protect her, but may trigger CGT and IHT issues; advice needed.
- Lifetime gifts - Derek could make PETs to Susan or his son, but must consider the 7-year rule and his own needs.
- Pensions and nominations - check beneficiary nominations.
Weighing
- The life-interest trust is the most flexible protection if they do not wish to marry.
- Marriage is the most tax-efficient but changes their personal status.
- Any transfer of the home must be checked for CGT, IHT (gifts with reservation) and care-fee implications.
Judgement: the priority is Susan's security (a will and trust), then tax efficiency; Derek should not assume the current will is adequate.