Tuesday, September 10th, 2019
What’s love got to do with it?
Cohabiting couples – those in a so-called common law marriage – are the fastest growing family type according to The Office for National Statistics with even Boris Johnson and Carrie Symonds getting in on the act. Yet only 26% of these couples have Wills.
The unfortunate reality is that without a Will the surviving partner of a common law marriage could be left with nothing.
Instead the estate will be divided up following the rules of intestacy. Which means that if your partner has children, the children will inherit the entire estate, and if they do not have children then the estate will be distributed to the other blood relations following the intestacy rules.
The options for the surviving partner are limited. They could make a claim against the deceased partner’s estate under the Inheritance (Provision for Family and Dependents) Act 1975 but this introduces costly legal fees and they can only claim for reasonable provision of maintenance. Any potential litigation is stressful, but even more so when you have lost a loved one, and it could see you suffer greater financial hardship.
There is also the option for all assets to be in joint names which would allow them to automatically pass to the other partner on death. For properties this would mean that the property would have to be held as ‘joint tenants’ which creates a Right of Survivorship. This means that if any one of the joint owners dies, the remainder of the property is transferred automatically to the survivor. This contrasts with tenants in common where a person’s share of the property will pass according to their Will or the rules of intestacy when they die.
Money, money, money, it’s a taxman’s world
While having a Will can help to financially protect both you and your partner if one of you dies there are also inheritance tax consequences for those in a common law marriage i.e. unmarried or not in a civil partnership which differ to their married or civil partnered counterparts.
At today’s current rates, the estates of a married or civil partnered couple could benefit from up to £950,000 passing free from inheritance tax regardless of who owns which assets or who dies first, and they can ensure there is no IHT due on the first of them to die. This is not the case with those partners who are not married or not in a civil partnership. This is due to the following;
Nil rate band for everyone
The first £325,000 of every person’s estate is free of inheritance tax and this is called the nil rate band. After this inheritance tax is charged at 40%.
Residence nil rate band for some
The residence nil rate band of £150,000.00 in 2019/2020 increasing to £175,000.00 in 2020/2021 is not available for everyone. To benefit from this the deceased person must own a property or a share in a property, which they have lived in at some stage and which is left to their direct descendants including children, grandchildren or stepchildren.
However, if you are married or in a civil partnership you also enjoy the following tax benefits;
• Spouse exemption – for those married or in a civil partnership
A married person or civil partner can use their Will to ensure there will be with no inheritance tax to pay when the first of them dies as gifts to a spouse/civil partner are exempt for IHT.
However, under intestacy laws, for married couples or civil partners with children the rules of intestacy may not take full advantage of the ‘spouse exemption’ and IHT may be due on the first death.
Civil partners or those in a common law marriage do not have the benefit of any IHT exemption when gifting to each other.
• Transferable nil rate band – for those married or in a civil partnership
The nil rate band of £325,000 that has not been used on the first death, or the percentage that has not been used, can be transferred to be used by the survivor in addition to their own nil rate band.
• Transferable Residence nil rate band Transferable nil rate band- for those married or in a civil partnership
Like the nil rate band for inheritance tax, the residence nil rate band can be transferred between spouses or civil partners if it is not used in whole or part when the first of them died.
We understand that planning for what should happen in the event of your death can be a daunting task. However, taking those steps now can help ensure that you put those close to you in the best position possible. If you are in a relationship but are not married or in a civil partnership, the implications for the partner you leave behind can be even greater. Our excellent Private Client Team at Hanne & Co can help you.