Wills for Unmarried Couples

by Stephen Meredith, Consultant Tax Specialist

The most obvious problem that unmarried couples face when making Wills is that spouse exemption for Inheritance Tax (IHT) purposes will not apply on the first death in the way that it would for a married couple or civil partners.  Instead the only allowance that will be available on first death is the individual IHT Nil Rate band (currently £325,000).  The value of any assets in excess of that amount will be chargeable to IHT at the rate of 40% subject to any reliefs that might be claimed for business or agricultural assets eg shares in a trading business or agricultural land.

 The new Residence Nil Rate Band (RNRB) can only be claimed to the extent that any interest in a residence is left down to lineal descendants eg children or grandchildren. From 6 April 2019 the RNRB is worth up to £150,000 for an individual rising to £175,000 on 6 April 2020 (see separate article on RNRB).

 It is NOT therefore sensible for unmarried couples to make Wills leaving everything (except possibly assets with a value below £325,000) to each other.  This is because those assets will suffer a double IHT hit at 40% on each death subject to any Quick Succession Relief (QSR) that might be claimed on second death if the deaths take place within 5 years of each other.

 What then can unmarried couples with significant assets do to protect themselves from this double IHT hit, assuming that they want the survivor to continue to have some benefit from their estate after they have died? The answer is to make a Discretionary Trust (DT) Will with an accompanying Letter of Guidance to the Trustees (who can include the survivor) setting out who the beneficiaries should be (again, these can include the survivor but can also include children, other family members, friends and charities) and how they should benefit eg whether from income or capital or both, or whether they should be permitted to occupy any residence (or share therein) forming part of the Trust Fund. DT Wills can also protect assets against care or nursing home fees.

 While the whole estate will be subject to IHT at 40% on the first death, on second death none of the assets will be subject to a further 40% IHT hit for the simple reason that the survivor does not own them – instead they are held within the Trust.  Discretionary Trusts are subject to their own IHT regime but this is much more benign than that which applies to individuals. Instead of the 40% rate which applies on death, the top rate of IHT applying to a Discretionary Trust is only 6% and this is levied every 10 years or when assets leave the Trust ie they are transferred out of the Trust to a beneficiary.  The 6% rate is levied on the extent to which the value of the assets in the Trust exceed the IHT Nil Rate Band (currently £325,000) at the date of the 10 year anniversary.  For example, if the value of the Trust assets at the 10 year point was £825,000 then the IHT charge would be (825,000 - £325,000) = £500,000 x 6% = £30,000 compared to 40% on death = £200,000. Therefore, even if the survivor were to live for another 20 or 30 years after the first death had occurred you can see that the total IHT payable on the Trust assets over that period would still be less than half of the 40% rate that would have applied on death.

 The IHT savings that can be achieved by unmarried couples simply having tax efficient Wills in place are very significant but are often missed out on by them either by not making Wills at all or by having had inappropriate or poor advice.  

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