Marrying or forming a civil partnership in order to save tax may not be romantic, but a recent case showed the benefits of so doing when a man married his lifetime partner shortly before he died, thereby allowing his estate, on which no Inheritance Tax (IHT) planning exercise had been carried out, to pass to his spouse free from IHT.
IHT can be a major issue when a couple have considerable assets but are not married or in a civil partnership. For many people, business assets may well qualify for relief from IHT under Business Property Relief (BPR). However, when a business has been successful, it is common for assets to be withdrawn from the business and the non-business assets will be taxable in full. It is also possible for assets inside a business not to qualify for BPR in some cases.
When these circumstances occur, the value of the assets will be subject to IHT on the first death and then may well be subject to IHT again when the surviving partner dies.
Consider a simple example. A couple have lived together for many years, each having assets of £500,000. If they are married, on the first death the whole estate could pass tax free to the survivor. On the survivor’s death, the estate would be taxable but the maximum IHT liability would be approximately £270,000 and, with the operation of the transferable nil-rate band, would most likely be considerably less.
If the couple are not married or in a civil partnership, the combined IHT bills for the two estates could be as much as £312,000.
Although the above figures are approximate and there are both tax planning and post-death mitigation strategies which can be adopted, what is clear is that failing to make appropriate arrangements to deal with IHT is a particular risk.
Click here for a guide to how IHT works.
Click here for information on the transferable ni-rate band.