Here comes the bride (and the tax savings)
I’m on my second marriage this year – not my own, my second pair of clients to have raced down the aisle after sitting with me to discuss their wills. Why? In a word, tax. Not the most romantic reason to say, ‘I do’ but, when faced with the alternative – a large inheritance tax bill, the question becomes ‘why don’t I?’
Later life relationships
Often couples coming together in later life already have children from previous relationships. Many of us want to ensure that our own wealth, amassed over a lifetime, is protected for our own children, but what about our new partner? We also want to make sure that once we are gone, our partner has the security of a roof over their head and sufficient funds to live comfortably.
Balancing act
How do we balance these competing needs? If you own your home in your sole name or in joint names with your partner as tenants-in-common*, your Solicitor may suggest the inclusion of a ‘Life-Interest Trust’ in your Will. This allows your partner to continue living in your house for their lifetime, and to receive an income from the assets in your estate, after your death. The capital in your estate is ring-fenced for your children and your partner cannot dispose of it, nor will it be taken into consideration in a care fee assessment of your partner’s ability to pay.
Inheritance tax
So, where is the problem? Marriage has a significant impact on your inheritance tax position. Taking the scenario above, where the couple are not married (let’s call them Jane and Desmond), if Desmond dies, leaving his estate on life-interest trust for Jane, his estate will attract inheritance tax at a rate of 40% on the value that exceeds the ‘Nil Rate Band’ (NRB) tax threshold of £325,000. Desmond’s estate will not be able to benefit from the additional ‘Residence Nil Rate Band’ (RNRB) of £175,000 as his home is not being left to his descendants immediately on his death. If we imagine Desmond’s estate is worth £500,000 on his death that would result in a tax bill of £70,000.
On Jane’s death (again let’s imagine her own estate is worth £500,000), the value of the life-interest trust will be added to the value of Jane’s own estate for inheritance tax purposes (giving a combined value of £1 million), and she will only have her own NRB of £325,000 to offset this. Jane will only be able to use her own RNRB if she owned a share in the house and is leaving this to her own descendants. This gives a maximum possible threshold on Jane’s death of £500,000 and a minimum tax bill of £200,000.
The same scenario looks very different if the couple are married. Desmond’s estate would benefit from spousal exemption (transfers between a married** couple are inheritance tax exempt), and no inheritance tax would be payable on his death. When Jane then passes away, not only will she have her own NRB and RNRB, she will also be able to use Desmond’s NRB and RNRB (transferable between married couples if unused on first death), giving a threshold of £1 million before inheritance tax would be payable. If the couple’s combined wealth were £1 million, no inheritance tax would be payable, equating to a total tax saving of £270,000.
Safety warning
If saving tax is enough to get you down on one knee, here are a few pointers to bear in mind before you buy the ring:
1. Marriage will automatically revoke your pre-existing will;
2. Gifts made in your lifetime may reduce the tax threshold available to your estate;
3. Seek tailored estate planning and Will writing advice from a SFE-accredited solicitor;
4. Speak to a family law solicitor to discuss pre-nuptial agreements; and
5. Lastly, let me know so I can buy a hat!
*Property is owned in joint names but each party owns a specified share, which passes under the terms of their Will on death.
**Including same-sex marriages and civil partnerships.