How would you feel if your partner, instead of inheriting all of your wealth, lost nearly 50% on your death?
Whether you are married or not can have a significant impact on the amount of Inheritance Tax that could be paid.
Marriage or being in a civil partnership changes the rules. Or more accurately, changes the allowances your partner is entitled to.
Partner have to pay Inheritance Tax? – Checking the rules
Firstly a reminder of what Inheritance Tax is.
The clue is in the title. It’s a tax paid that could be due at the point you inherit assets on a persons death.
There are various allowances that we will cover in a moment that mean certain amounts are not subject to Inheritance Tax. But anything above these allowances is usually subject to a 40% Inheritance Tax charge, to be paid before the rest of the deceased estate is released!
According to the latest forecasts by the Office for Budget Responsibility Inheritance Tax receipts will reach £6.3bn by 2023/24!
Inheritance Tax allowances
The main Inheritance Tax allowance is called the Nil Rate Band. Every person is entitled to leave £325,000 without Inheritance Tax being charged.
The other main allowance is called the Residence Nil Rate Band. This applies to the family home. Every person who owns a home and passes it onto direct descendants will have an additional Inheritance Tax allowance of £150,000, rising to £175,000 from April 2020.
Marriage / Civil Partnership
If you’re married or in a civil partnership then everything you leave to your spouse will be exempt from Inheritance Tax. You also don’t use up your Nil Rate Band or your Residence Nil Rate Band.
If you leave everything to your spouse, as a bonus, your spouse gets to keep your allowances meaning their Nil Rate Band and Residence Nil Rate Band doubles. This won’t apply if the survivor re-marries though.
If you’re in a couple but not married or in a civil partnership, then you are treated as single for Inheritance Tax purposes.
You can still leave everything to your partner but you will be using your Nil Rate Band and your Residence Nil Rate Band, so there is more chance Inheritance Tax could be paid.
Bob and Diane are married and each own £475,000 in assets (including their family home) in their own names.
Bob dies and leaves everything to Diane. There is no Inheritance Tax to pay as Bob and Diane are married.
Diane is now worth £950,000.
Diane never re-marries and on her death she leaves everything to the two children.
£950,000 – £650,000 (combined Nil Rate Band) – £300,000 (combined Residence Nil Rate Band)
= £0 subject to Inheritance Tax.
Ian and Sarah are not married and also each own £475,000 in assets (including their family home) in their own names.
Ian dies and leaves everything to Sarah. There is no Inheritance Tax to pay as Ian has used his £325,000 Nil Rate Band and his £150,000 Residence Nil Rate Band.
Sarah is now worth £950,000.
Sarah never marries and on her death she leaves everything to the two children.
£950,000 – £325,000 (Sarah’s single Nil Rate Band) – £150,000 (Sarah’s single Residence Nil Rate Band)
= £475,000 subject to Inheritance Tax at 40% = £190,000
Partner have to pay Inheritance Tax? – Ways to avoid
So, if you’re not married and apart from the obvious, there is planning you can do to avoid it.
- Spend your wealth or gift it to family, friends or charity.
- Insure against your Inheritance Tax liability.
- Place assets into Trusts.
- Make Inheritance Tax friendly investments.
If you would like more information on Inheritance Tax, details on the rules and how to avoid it, then we have access to a very useful guide. If you would like us to email you a copy for FREE please get in touch and request it.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.