Married couples can pass on up to £1 million free of inheritance tax if they leave a family home to children or direct descendants, thanks to a spousal exemption that allows spouses to leave their entire estate to each other without death duties. The rule is set to become even more valuable from next April, when unspent pensions will be treated like other assets such as homes, savings and investments for inheritance tax purposes. Unmarried partners may now reconsider whether to marry to avoid a large tax bill, whilst already married couples might think about leaving more of their estate to a surviving spouse rather than children.
Inheritance tax is charged at 40 per cent on estates above certain thresholds. A single person needs assets of at least £325,000 before becoming liable, or £650,000 for a married couple. Those thresholds rise to £500,000 and £1 million respectively if passing a family home to direct descendants. Childless people miss out on the second £175,000 per person allowance, known as the residence nil rate band. Ian Dyall, head of estate planning at Evelyn Partners, said the spousal exemption will become 'pretty much the only way to ensure a bequeathed pension will not be subject to inheritance tax on the first death at least'. He added that 'elderly, long-term cohabiting partners with significant pensions might consider getting married for a big tax saving on the first death'.
Unmarried couples face particular risks under inheritance rules. Without a will, a surviving partner has no automatic inheritance rights, which can be particularly difficult for families with young children. Cathryn Culverhouse, partner at law firm DMH Stallard, explained that 'a person can be in a loving, committed relationship for many years and still have no automatic right to inherit from their partner's estate if they die without a will'. Harriet Betteridge of Charles Russell Speechlys warned that 'for unmarried couples, the inheritance tax rules can come as a nasty surprise' and said the changes are already prompting some couples to marry. Louise Scholes of Brabners Personal noted that many unmarried couples mistakenly believe 'common law marriage' gives them the same legal rights as married couples, which is not the case.
For those unwilling to marry, several alternatives exist. Lifetime gifts between unmarried partners can fall outside inheritance tax if the donor survives seven years. Life insurance written into trust sits outside the estate and can provide cash for the survivor. Married couples and civil partners can also transfer unused inheritance tax allowances to a surviving spouse or civil partner, increasing the amount that can ultimately be passed on tax-free. Most people can gift £3,000 a year plus unlimited gifts of £250, though gifts to anyone other than a spouse fall under the seven-year rule, with inheritance tax charged on a sliding scale starting at 40 per cent if within three years.
Wedding gifts also receive preferential treatment under inheritance tax rules, though this is less well known. Gifts to a child when they marry are exempt up to £5,000, whilst gifts to a grandchild or great-grandchild are exempt up to £2,500, and gifts to anyone else are exempt up to £1,000. Pension savers should check their beneficiary nominations, as many will have named their children under the current regime, a choice that may need reconsidering given the upcoming changes.
For savers and those planning their estates, marriage or civil partnership now offers significant tax advantages when leaving substantial assets, particularly pensions and family homes, though it comes with wider legal consequences including greater rights on separation.