Inheritance tax planning for unmarried couples

If you are a couple but are not married or in a civil partnership, it can be easy to overlook the need for inheritance tax planning. Unmarried couples in Scotland are not entitled to the same exemptions and reliefs as married couples. This means that without proper planning, unmarried couples may face significant tax liabilities when passing on their assets to their loved ones.

In Scotland, inheritance tax is levied on estates valued over £325,000 with a tax rate of 40% on the value of the estate above this threshold. However, there are some exemptions and reliefs that can reduce or eliminate tax liability. Any assets which are passed between spouses or civil partners, whether during life or after death, are tax-free.

This means an estate of up to £650,000 on the second death of the spouse or civil partner will be free from inheritance tax rather than just the £325,000 basic inheritance tax threshold to which each individual is entitled. In some instances, if someone dies and their estate is worth more than the basic inheritance tax band, their estate may qualify for the residence nil rate band (RNRB) before any tax is due, if they are leaving a heritable property to a direct descendant. The current RNRB is up to £175,000 per person (depending upon the property value) and there may be a transferrable RNRB available from a late spouse or civil partner’s estate which can be added to the allowance.

However, it is important to note that the basic nil rate band and any unused RNRB cannot be transferred on to a partner if a couple are unmarried, which means that if one partner dies, the surviving partner may have to pay inheritance tax on the assets they inherit, if the estate exceeds the threshold. In additional, as a partner is not considered a direct descendant, if a heritable property is left to them by their partner, the RNRB will not be available to them, only the £325,000 basic inheritance tax band.

How to lessen inheritance tax

To improve this scenario, unmarried couples can take steps to reduce their inheritance tax liability. One option is to make use of the annual gift allowance, which allows individuals to give away up to £3,000 each tax year without incurring any inheritance tax liability. This can be a useful way to gradually pass on assets to loved ones over time. Gifting larger amounts over time may also be a way to reduce inheritance tax liability. Gifts given more than 7 years before you die, will not be taxable, however, those gifts given 7 years before you die will likely be taxable, but they will be taxed on a sliding scale known as “taper relief” on the gifted amount in excess of the £325,000 basic inheritance tax threshold.

Another option is to set up a trust. Trusts can be used to hold assets for the benefit of beneficiaries and can be a tax-efficient way of passing on assets. For unmarried couples, a discretionary trust may be particularly useful, as it allows the trustees to distribute assets to beneficiaries as they see fit. This can provide flexibility and control over the distribution of assets.

It is also important for unmarried couples to make a will. Without one, the rules of intestacy will apply, which can result in assets being distributed in a way that does not reflect the couple’s wishes. Making a will can ensure that assets are distributed as you would like and can help to avoid disputes and legal complications.

In addition, unmarried couples can consider taking out life insurance. Life insurance can provide a tax-free lump sum payment in the event of the policyholder’s death, which can be used to pay off any inheritance tax liability or provide financial support for loved ones.

Seeking professional advice

To avoid unnecessary tax liabilities, it is a good idea for unmarried couples to seek professional advice. Inheritance tax planning can be a complex and ever-changing area of law and it is important to seek guidance from a qualified professional who can provide tailored advice based on the couple’s individual circumstances.

McSherry Halliday has a team of expert advisers who can help you navigate complex tax issues and best plan for you and your loved ones’ future.