Cohabitation, or living together without being married, is becoming increasingly more common in the United Kingdom. There are a number of legal differences between the two, which can have a significant impact on both parties involved.
Here we look at some commonly asked questions about the legal differences between marriage and cohabitation.
I’ve been married once already – why should I have to do it again just to save inheritance tax?
Picture this – I am currently living with my partner of 10 years. We have no children and I am a widow. While marriage certainly at one point played a huge part in my life (for better or worse!) I haven’t particularly felt any urgency to go through it again – for one thing it would save quite a bit of money.
I was previously aware of the benefits which marriage afforded me from an inheritance tax (IHT) perspective, but what about now that I am a cohabitee? How has the position changed – I’ve heard the law continues to be rather unfair in this regard?
Firstly, it’s very shrewd to get one’s affairs in order sooner rather than later, so thinking about these things now is crucial.
Secondly, it’s worth noting that every individual has an allowance at death which is taxed at 0% – this is called the ‘nil-rate band’ (NRB) and is currently set at £325,000. A further allowance of £175,000 can also be applied to estates where a main home or the proceeds from the sale of that home, is then passed on to direct descendants (children, grandchildren etc.).
Having taken into account these allowances, the excess estate bears an IHT charge of 40%. As painful as that sounds, potentially all is not lost, particularly where you’ve been married previously. For instance, if your late spouse left their entire estate to you when s/he died, then:
- the entire estate passed to you would be 100% tax-free (the ‘spousal exemption’); and
- your late spouse’s full current NRB of £325,000 could be added to your own NRB, bringing your total nil-rate allowance before tax is due, to £650,000.
Complications could arise if for instance your late spouse didn’t give everything to you but perhaps split their estate between you and other beneficiaries – you could still benefit from the transferable allowance though. In that case, the available allowance would be determined by a percentage calculation carried out against the nil-rate allowance in force at their death. If that’s the case, then marrying again can prove beneficial for financial claims as you’ll see below.
If you were to marry again, then your second spouse, if they died before you, can leave their NRB to you in addition to your previous spouse’s NRB (up to a maximum of one full individual NRB).
The upshot of all this, is that while it may sound terribly unromantic in this context, one of the most sure-fire ways to protect a partner from a hefty tax bill is in fact to marry them!
What if I’m still very against a subsequent marriage – is there anything else I can do to save inheritance tax being due on my estate?
To a degree yes – you can give away certain amounts of money every year to relieve your estate of its potential tax burden.
For example, you can give away up to £3,000 a year (your ‘annual allowance’) to anyone tax free, and you can increase this by adding to it any unused annual allowance from the previous tax year, up to £6,000. Caution needs to be taken though, as if you give away amounts exceeding these figures, and fail to survive 7 years from the date of the gift, those gifts may become chargeable to IHT. Even so, a careful, regularly reviewed annual plan is a good IHT-mitigating strategy.
If such a plan would suit your particular circumstances, then the sooner you can start giving away money to relieve your estate of being potentially chargeable to tax, the better.
There are some other allowances which you can use, such as £250 to any amount of people per year; or £1,000 to anyone for their forthcoming marriage (this figure is increased where it’s descendants getting married – £2,500 for a grandchild, and £5,000 for a child).
You could also make regular gifts out of surplus income, so long as those gifts:
- Were made out of normal expenditure;
- Were made out of income (not investments); and
- Clearly don’t detrimentally affect your lifestyle – i.e. could you maintain your normal standard of living having made the gifts from your income?
While the last point above makes it sound quite lucrative from an IHT-saving perspective, care would need to be taken as HMRC often scrutinise the giving away of substantial income that wasn’t regular/didn’t establish a consistent pattern.
In summary, while marriage still tops the list for the most beneficial way to mitigate or potentially even wipe out an IHT bill, there are other ways to begin to alleviate the potential tax burden on your estate.
If you have any queries or require a more detailed explanation, please don’t hesitate to contact one of our Private Client Team who’ll be delighted to assist.
Where to find us
We have offices in Bury St. Edmunds, Sudbury and London.
© Atkins Dellow LLP 2022
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