Published On: Sat, Feb 10th, 2024

Inheritance tax shock as thousands of unmarried couples at risk of unexpected bill | Personal Finance | Finance

Inheritance tax is set at 40 percent of the value of an estate above a particular threshold – usually £325,000. However, an exemption can occur on IHT if a person leaves everything above this threshold to their spouse, civil partner, a charity or community amateur sports club.

This traditional rule on the tax could present an issue for couples who are cohabiting yet unmarried.

When it comes to inheritance tax, couples must be married or civilly partnered in order to pass wealth on without tax.

With more people choosing to cohabitate with their partners rather than necessarily entering marriage or civil partnership, this could create issues later down the line with an unexpected bill. 

Of course, couples will be able to make their own decision on the matter, but should be aware of the potential consequences.

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There are particular considerations to bear in mind when it comes to property, which can involve large amounts of money.

Ms Pollard explained: “If you are joint tenants – meaning you both own all the property – and your partner left you everything in their Will, you would have to pay a 40 percent tax bill if their assets (including the property you joint own) are valued at more than the single person inheritance tax threshold of £325,000.”

Once a partner has passed away, then the property would be owned by the surviving individual in its entirety.

Some couples, however, may die without a Will in place, perhaps as they did not consider the document or someone passed away unexpectedly.

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“However, without a Will, any family members of your partner would have a right to claim their share of other assets left, but they’d also then pay their share of any potential tax bill.”

The standard inheritance tax rate is 40 percent, and is only charged on the part of the estate that is above the threshold.

For example, if an estate is worth £500,000 and a tax-free threshold is £325,000, then the inheritance tax charged is 40 percent of £175,000.

The estate can pay inheritance tax at a reduced rate of 36 percent on some assets if one leaves 10 percent or more of the “net value” to charity in their Will. 

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