Wills, Inheritance Tax and the Modern Family
20 August 2019 by Lauren Hancock
The once typical, matriarch, patriarch and 2.4 children family can no longer be considered the norm in the UK. Marriage rates are at an all-time low, with cohabiting couples becoming more and more common and the number same-sex couple families increasing by over 50% since 2015. As a nation of families of all shapes and sizes, it is important to understand the impact of your family makeup on your estate when you pass away.
Intestacy Rules and Wills
Under the intestacy rules, which apply when someone dies without having made a Will, the person or people who will inherit your estate may differ depending upon whether or not you are married or in a civil partnership:
- If you are married or in a civil partnership and have no children, your surviving spouse or civil partner will inherit your entire estate.
- If you are married or in a civil partnership and have children, grandchildren or great-grandchildren, your surviving spouse or civil partner will inherit the first £250,000 of your estate and the remainder will be divided between your spouse or civil partner and any children, grandchildren or great-grandchildren who survive you.
- If you are unmarried, even though you may have been cohabiting with your partner for many years, they will not inherit any of your estate under the intestacy rules.
To ensure that your estate passes in the manner that you wish, it is therefore important that you prepare a Will during your lifetime. This allows you to dictate who is to inherit from your estate.
The rules also differ in respect of inheritance tax for married couples and those in civil partnerships vs those who cohabit.
Every person has an inheritance tax “nil rate band”, basically a tax free allowance which can be utilised on a death estate. At present this is £325,000. When the first member of a marriage or civil partnership dies, leaving some or all of their estate to their surviving spouse or civil partner what is called the “spousal exemption” applies in respect of inheritance tax. What this means is that any amount left to a spouse or civil partner is not taxed on the death of the first of them, if this is left to the survivor.
When the second of the marriage or partnership passes away, they are able to utilise any percentage of the unused nil rate band which was not used on the death of the first, for example;
- Jack is married to Jill. Jack passes away leaving all of his estate to Jill. There is no tax to pay at this time due to the spousal exemption. Jill passes away one year later and at the time of her death the inheritance tax nil rate band allowance is £325,000. At the time of her death, Jill can use her nil rate band allowance of £325,000 in addition to 100% of Jack’s unused allowance. Jill therefore has £650,000 nil rate band allowance available to utilise against her estate.
For cohabiting couples, the spousal exemption cannot be utilised and it is not possible to transfer any unused nil rate band to a partner on the second of their deaths. What this means is, when the first of a cohabiting couple dies, if they leave their estate to their surviving partner, any amount over their £325,000 nil rate band allowance will be taxed at 40%. When the second partner dies, they too will be taxed at 40% on any amount over their own £325,000 nil rate band allowance. For example;
- Jack and Jill cohabit. Jack passes away leaving his £350,000 estate to Jill. After his nil rate band allowance is deducted, Jack’s estate is liable for inheritance tax on £25,000. His inheritance tax bill is therefore £10,000. Jill dies 5 years later. Her estate totals £650,000 including the assets left to her by Jack. She is only able to utilise her own nil rate band allowance of £325,000. Her taxable estate totals £325,000. The inheritance tax due on her estate is therefore, £130,000.
If you wish to prepare a Will or require further advice on inheritance tax, we at Fisher Jones Greenwood are here to help. Call us on 01206 700113 or email [email protected] to arrange an appointment.
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