Inheritance Tax is said to be a 'bigger threat to family wealth than ever', with receipts soaring to a record-high of £6.1 billion across the 2021/22 financial year. These will steadily continue to rise further too, with the £325,000 nil-rate threshold staying frozen solid until 2026.
Although the married and those in civil partnerships will have some form of protection, as they are able to transfer assets free of Inheritance Tax while also able to inherit others' allowances, singletons and people not registered as married cannot - even if they have been in a relationship for decades.
More than six million Brits cohabit with their partner, and they risk paying higher rates of IHT when one of them dies should money be left to them. And in some worse cases, they could pay the hated 'death tax' twice.
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And The Daily Express report that people often do not realise the danger until it is too late to do anything about it. While many are young, an increasing number of cohabitants are older partners on second or third marriages - who do not wish to make their relationship official due to disapproving children or past failures.
Th Government insists that long-term live-in couples must be formally married or in a civil partnership should the survivor inherit their partner's assets free of Inheritance Tax. However, Paul Wilcox, founder of wealth planners WAY Group, said: "This seems unnecessarily harsh in this day and age, when divorce and widowhood is so commonplace, and family pressures can often compromise those later life relationships.”
When a spouse passes away, their partner can inherit their £325,000 nil-rate threshold, on top of the £175,000 main residence allowance which applies where people are passing on their main home to direct descendants like children and/or grandchildren. This totals to a potential sum of £500,000 of IHT allowance - which allows married parties to pass on some £1million of wealth to close family members.
In the case of the unmarried, if one partner dies the value of their wealth above £325,000 will automatically be taxed by 40 per cent - like if they were single. This rule applies even should they leave the entirety of their estate to their surviving partner. The tax must also be paid before the wealth is passed on.
And if most of the couple's shared wealth is named by the deceased partner - the inheritee could face a substantial bill.
Wilcox, added: "Denying long-term and devoted couples who failed to formalise their relationship IHT relief on their joint assets when one dies is unfair.” Paul has in turn seen various cases of elderly couples who have avoided marriage to avoid upsetting intricate family structures, as well as because their children were straight up against it.
Sam Ratnage, chartered financial adviser and wealth manager at Tideway Investment added: “If above the threshold, IHT will be payable, and the nil-rate bands will not be inherited.”
Unmarried parties who live together could also be hit with hefty IHT twice, both on the first and second death, with Ratnage continuing: “Unless they have planned for this, the surviving partner or children may have to sell assets such as a family home to pay the tax bill.”
Ratnage has in-turn called on cohabiting couples to review and understand their inheritance tax exposure.
“One option is to set up a savings plan to pay the estimated IHT tax, possibly with life insurance to meet a possible tax bill for your loved ones. Advice is essential," he said.
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