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Living together can be taxing

14 Aug 2013

Alice Clewes, Partner and Chartered Tax Adviser at Hay & Kilner, looks at the options available for cohabitees to reduce their Inheritance Tax liabilities.

Increasingly couples live together, or cohabit, without marrying or entering into a civil partnership. There are many reasons why people choose not to marry or to enter into a civil partnership but in making that decision they may not realise there can be adverse implications, in particular on their deaths.

Contrary to popular belief, a “common law spouse or partner”, as a cohabitee may be known, has no legal standing under the intestacy rules. The intestacy rules apply when a person dies without a Will and they specify who is to receive the assets. If the cohabitees do not have Wills when one of them dies the surviving person will not be entitled to inherit under the rules, no matter how long they have been living together or the number of children they may have together. It is therefore essential to have Wills prepared to make appropriate provision for the survivor.

Even if Wills are prepared the tax world also does not recognise the “common law spouse or partner”. So if one of the cohabitees dies leaving everything to the surviving partner and their assets exceed the tax free allowance of £325,000 there will be Inheritance Tax to pay. The first cohabitee’s assets which could include the family home may need to be sold to pay the tax. If the couple had been married or in a civil partnership complete exemption from Inheritance Tax would have applied.

So aside from marrying or entering into a civil partnership is there anything that cohabitees can do to reduce Inheritance Tax when they die?

The options available will depend on the personal circumstances of the couple. One option is to “equalise” their assets to ensure they can both make use of their tax free allowances when they die. This can be achieved by firstly purchasing any new assets in their joint names or, for existing assets, the couple could make gifts from one to the other. Such gifts will need to be structured carefully to avoid immediate tax. Secondly Wills should not leave everything outright to the surviving cohabitee as it will be subject to Inheritance Tax a second time on their death. Instead gifts to other family members could be considered or, if the surviving person will need access to the assets, a gift could be made to a trust and the surviving cohabitee would be a beneficiary.

Another alternative is to take out insurance to cover any Inheritance Tax so the survivor will not be forced to sell assets to pay the tax. The insurance should be written into trust meaning the proceeds themselves are not subject to Inheritance Tax.

Relationships today can be very complicated where partners may be reluctant to marry, perhaps as it is a second relationship, or marriage may only eventually follow after an extended period of living together. The existence of children both of the existing and past relationships adds to the complex personal issues and great care needs to be taken to ensure affairs are structured as far as possible to minimise tax but also to achieve personal objectives. For example, a partner may wish to ensure that their own children benefit on their deaths and not necessarily the children of their partner’s previous relationship.

We have a team of specialist wealth management solicitors who can provide tactful and tailored advice for your personal circumstances for both Will and lifetime Inheritance Tax planning.

For further advice please contact Alice Clewes on 0191 232 8345 or email: alice.clewes@hay-kilner.co.uk