Marriage avoids potential double charge to Inheritance Tax

Not the most romantic reason for marrying, but good tax planning.

If a couple are married or in a civil partnership at the time of the first death, assets passing to the survivor of them outright, or to a life interest trust for the survivor, will be exempt from Inheritance Tax (IHT) as they will qualify for the spouse exemption for IHT purposes.

However, if a couple are unmarried or not in a civil partnership at the time of the first death, assets passing to the survivor of them (either outright or to a life interest trust for the survivor) will not benefit from the spouse exemption, resulting in a potential double-charge to IHT – once on the first death and then again on the second death.

A new client who has been cohabiting with his partner for over 40 years came to Thomson Snell & Passmore for advice regarding his Will; he has an estate which is worth in the region of £440,000 made up of a house in his sole name and cash/investments. The client has grown-up children from a previous marriage which ended in divorce.

The client explained that his priority, if he died first, was for his surviving partner to benefit from his estate during her lifetime whilst protecting the capital for his children.

The most tax-efficient way of dealing with the client’s estate so that his partner could benefit from the assets during her lifetime would be for his estate to pass to a discretionary trust on his death (please find more information about this in our Discretionary Trusts in wills information sheet); the trust fund would not then be aggregated with his partner’s estate for IHT purposes on her subsequent death. However, the discretionary trust will be subject to a separate IHT regime which would involve potential IHT charges on distributions of capital and on each 10-year anniversary after the client’s death and HMRC may argue that if the client’s partner continues to live in the house following his death, she would be treated for IHT purposes as having a life interest in the house.

She said yes!

As the client is intending to marry, Thomson Snell & Passmore advised that the most tax-efficient way of dealing with his estate would be for it to pass to a life interest trust for his wife; there will be no IHT to pay on the client’s death and his wife will have an entitlement to income and enjoyment of the trust fund (including occupation of the client’s house); the trustees will also have power to pay capital to her (and to his children). Although IHT may be payable on her subsequent death, this will be subject to the availability of any reliefs or exemptions.