Avoiding Inheritance Tax for Cohabiting Couples

If you are married to your partner then there are lots of financial and tax benefits. If you have been cohabiting though, for however long, then you are not entitled to any of them. If you partner dies then you could lose out on a lot of money via inheritance tax that you would not be eligible to pay if you had been married.

What is Inheritance Tax?

When somebody dies, inheritance tax is paid on the value of their estate that is over £300,000. Their estate includes any assets, property or investments that they may have at the time of their death. The value that is above the £300,000 threshold is taxed at 40% so a huge amount of money can be lost, especially with property prices being so high.

Who is Exempt?

If you are married or in a legal civil partnership then your estate can be passed on to your partner or spouse without being liable for any inheritance tax. You can also choose to pass your estate to a charity, political party or some national institutions such as universities or the national trust and no inheritance tax will have to be paid. However, if it passes to your cohabiting partner then they will have to pay the full amount of tax.

How Can I Avoid Inheritance Tax?

If you want to leave your estate to your cohabiting partner and have no plans to marry then there is really no way to avoid the majority of the inheritance tax. However, if you plan ahead, there are gifts that you can give to decrease the capital that it is left to pay tax on. You can legally give a gift of up to £3,000 a year. If you haven’t done this one year you can carry your allowance over to the next year and give £6,000 but it is not valid for any longer than that. You can also give away as many small gifts op up to £250 a year as you want, but not all to the same person. So, realistically you can give your partner £3250 a year from your estate. Also, any gifts that you have made over seven years before your death are exempt from inheritance tax.

How Else Can I Protect My Partner?

The best thing you can do, if you aren’t going to get married, is to make sure that your property is in joint names. This way, the half that is legally your partner’s will not count as part of your estate, will not be liable for inheritance tax and may bring your assets below the threshold. However, be sure that you make it a ‘joint tenancy’ and also prepare a will otherwise they not be liable to inherit your part of the house and may have to sell it.

Unfortunately, if you are not married or in a civil partnership then you partner can do little to avoid inheritance tax. By making small annual gifts, writing a will, and making sure your partner is a joint tenant of your property you will make them less likely to be liable.