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UK Inheritance Tax: spousal exemptions and how UK succession law treats unmarried couples

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Inheritance Tax (IHT), the tax levied on the estate (which includes property, money, and possessions) of someone who has passed away, can often be complex to calculate. The rules around spousal exemptions and how the succession laws treat unmarried couples are worth knowing when you’re estate planning.

IHT: Thresholds, Rates and Exemptions:

First, it’s worth understanding the general rates, thresholds and exemption for IHT so we can compare them to married and unmarried couples.

The standard Inheritance Tax rate is 40%, and it’s only charged on the part of the estate that exceeds the £325,000 threshold.

  • For example, if your estate is worth £500,000 and your tax-free threshold is £325,000, the Inheritance Tax charged will be 40% of the excess (£175,000).
  • If you leave 10% or more of the ‘net value’ to charity in your will, the estate can pay Inheritance Tax at a reduced rate of 36% on some assets.

There is normally no Inheritance Tax to pay if either:

  • The value of the deceased’s estate is below the £325,000 threshold.
  • Everything above the £325,000 threshold is left to the spouse, civil partner, a charity, or a community amateur sports club.
  • If you give away your home to your children (including adopted, foster, or stepchildren) or grandchildren, your threshold can increase to £500,000.
  • If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold upon their deaths.

The standard Inheritance Tax rate is 40%, and it is charged only on the part of the estate that exceeds the threshold.

  • For example, if your estate is worth £500,000 and your tax-free threshold is £325,000, the Inheritance Tax charged will be 40% of the excess (£175,000).
  • If you leave 10% or more of the ‘net value’ to charity in your will, the estate can pay Inheritance Tax at a reduced rate of 36% on some assets.        

     

Spousal Exemption for Inheritance Tax

When you’re married or in a civil partnership, there are inheritance tax exemptions to consider.

  • Married couples and civil partners domiciled in the UK can pass on their entire estate to their spouse without incurring any Inheritance Tax.
  • There is no limit to the value of the estate that can be passed on tax-free to a spouse.
  • This rule encourages couples to leave everything to each other, ensuring a smooth transfer of assets upon one partner’s passing.

 

Unmarried Couples and Inheritance Tax

Unmarried couples do not have the same inheritance tax benefits as married couples.        

  • When an individual in an unmarried couple dies, there is no spouse exemption, and the nil rate band (and, if available, the residence nil rate band) are not transferable to the surviving partner.
  • If you are unmarried or not in a civil partnership and leave your estate to your partner, they will receive their share less any inheritance tax payable.

 

Other IHT Reliefs and Exemptions

With Inheritance Tax, there are some tax reliefs and exemptions to be aware off. These can help you to reduce the Inheritance Tax bill you loved ones or those benefitting from your inheritance might face.

  • Gifts: Some gifts given during your lifetime may be taxed after your death. “Taper relief” might reduce the Inheritance Tax charged on such gifts.
  • Business Relief: This allows certain assets to be passed on free of Inheritance Tax or with a reduced bill.
  • Agricultural Relief: Applies if your estate includes a farm or woodland.
  • Married couples and civil partners: These can pass their estate to each other tax-free. The surviving spouse can inherit the entire estate without paying Inheritance Tax. Unused tax-free allowances can also be passed on to the surviving spouse or civil partner.

Find out more about inheritance tax with our in-depth FAQs.

In summary, understanding UK inheritance tax and its exemptions is crucial for effective estate planning. Whether married or unmarried, seeking professional advice from wealth management solicitors can help navigate the complexities of inheritance tax and ensure your assets are handled appropriately.