Let’s get practical – How does marriage affect Inheritance Tax?

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Whilst marriages and civil partnerships are about love and finding your life partner, it’s worth being aware of the tax implications involved. It’s not all roses. This article specifically outlines some of the affects on Inheritance Tax that are associated with these legal partnerships.

Marriages & wills

If someone creates a will with the intention of getting married (contemplation of marriage) to a specific person, or based on the condition of marrying a particular person, this will becomes valid once the marriage or civil partnership takes place. However, it’s crucial that this kind of will is clear and specific about the intended marriage, mentioning the person’s name and not just using vague terms and an unspecified time.

On the other hand, if a person writes a will and then gets married, or enters into a civil partnership, the act of getting married or forming the partnership automatically cancels that will. In such a case, if the person dies without making a new will, their estate will be distributed according to the laws of intestacy. Therefore, it’s extremely important to ensure that either both partners write wills ‘in contemplation of marriage’ beforehand, or they promptly create, or update their wills immediately after.

There’s one exception to this rule. If a civil partnership is converted into a marriage (possible after 27 November 2014), the marriage will not revoke a will beforehand.

Minimising Inheritance Tax between partners

When a married couple, or those in a civil partnership, transfer money or assets to each other, they don’t have to pay Inheritance Tax (IHT). So, if one spouse passes away and leaves everything to the other, there won’t be any IHT to pay on their estate. Additionally, throughout their lives, they can make gifts to each other without worrying about IHT.

However, unmarried couples who live together, the situation is different. If one partner leaves everything to the other, only the deceased partner’s tax-free allowance can reduce the amount of IHT owed. Also, gifts passed to each other during their lives could be subject to IHT if the giver doesn’t survive seven years after making the gift.

Therefore, getting married, or entering into a civil partnership, is definitely beneficial for minimising IHT.  

Is your legal partner non-UK domiciled?

In the majority of cases, couples in a legal partnership can transfer money or assets between themselves without having to pay IHT; there’s one exception to this rule.

When a UK domiciled spouse (someone considered a permanent resident in the UK for tax purposes) gives a gift to a non-UK domiciled spouse (someone who is not a permanent resident in the UK for tax purposes), the amount they can gift over their lifetime is limited to £325,000.

Note, this limit of £325,000 is a total for their entire lifetime and doesn’t reset every seven years like the nil-rate band (NRB), which is the threshold at which Inheritance Tax starts to apply. It also doesn’t reset if the taxpayer later marries a different non-UK domiciled spouse.

This limit will stay fixed until the end of 2028.

‘Family’ gifts

If you give money or assets to maintain or support your family members, it won’t be counted for IHT purposes. The term ‘family’ refers specifically to spouses, civil partners, minor children, and elderly relatives. ‘Maintenance’ for spouses and civil partners includes basic necessities like food, shelter and clothing.

This exemption doesn’t apply to support given to ‘girlfriends and boyfriends.’

Marriage allowance

The IHT marriage allowance (MA) allows you to give a certain amount of money as a gift to a marriage or civil partner, without having to pay IHT. The amount you can give depends on your relationship to the person you are in a legal partnership with.

If you’re giving the gift to your child’s marriage or civil partnership, you can give up to £5,000 IHT-free. This means if both parents have unused gift allowances from the previous year, the couple could receive up to £44,000 from their four parents without any IHT.

For a grandchild’s marriage or civil partnership, the limit is £2,500 IHT-free.

If you’re part of the marriage party, meaning you’re giving a gift to your future spouse or civil partner, the maximum amount you can give without IHT is £2,500.

For anyone else not falling into the categories above, the maximum IHT-free gift is £1,000.

However, this relief cannot be used in addition to the above gifts. You can only give once without paying IHT, and the allowance is per marriage or civil partnership. For example, as a parent, you can’t give £5,000 to your daughter and then an extra £1,000 to your future son-in-law, without facing IHT on the additional gift.

Nil-rate band and residence nil-rate band

If you’re married, or in a civil partnership, there’s an advantage to save the general and residence NRBs of a pre-deceased spouse, dependent on whether they had not used these prior to death.

When someone gets married, or enters into a civil partnership, they can benefit from their deceased spouse’s unused tax allowances, if they hadn’t used them prior to passing away.

This transferable allowance is a percentage of the unused allowance from the earlier spouse’s death.

For example, if the first spouse died when the tax allowance was £300,000 and they had given £150,000 as a gift to someone who had to pay tax on it, the rest of their estate went to their spouse. If the second spouse passes away in 2023, they would get to add half of the current tax allowance (£325,000) to their own allowance of £325,000, giving them a total tax allowance of £487,500. The allowance for the residence (home) works in a similar way. This can help the surviving spouse or partner potentially reduce the amount of tax they have to pay when they pass away.

Gifts with reservation of benefit

A ‘gift with reservation of benefit’ (GWRB) happens when someone gives a gift to another person, but the receiver can’t fully benefit from it. This often occurs because the person who gave the gift is still benefiting from it in some way. For example, if someone gives their house to their child but continues to live in it.

However, when gifts are made between spouses and civil partners, this problem usually doesn’t occur. In those cases, there is no GWRB issue, meaning the gift is considered complete and without reservation.

Need some guidance?

If you would like to discuss any of the topics covered above and how they may affect you, then please contact us and one of our team will be happy to have a conversation.

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