Inheritance tax ‘rules to be aware of’ for cohabitating couples

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Inheritance tax: Financial advisor provides advice

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Due to inflationary pressures and rising house prices, more and more people are expected to pay the tax with the Office for Budget Responsibility (OBR) forecasting around 6.5 percent of estates could be liable for inheritance tax by 2026. With more people having to pay the tax, Heather Pollard, head of underwriting at Tower Street Finance highlights the important things people need to know about it.

Ms Pollard said: “When someone passes away, and their will is read, discovering that you’ve been left money or items of value can be a nice discovery during an otherwise difficult and upsetting time.

“However, the probate process, the legal bit, and inheritance tax, the expensive bit, aren’t always easy to understand, and there are lots of steps and rules to be aware of.”

Inheritance tax is the tax that is charged on the value of a person’s estate when they die, and the estate refers to all their property and valuables.

This also includes bank accounts, pensions, homes or other buildings, land, jewellery, vehicles, shares, jointly owned assets, and payouts from insurance policies.

Any debts, such as mortgages, funeral expenses, other taxes or expenses are taken from the total estate value first, and then inheritance tax is only paid on the remaining amount.

This will be at a rate of 40 percent, if it exceeds the £325,000 threshold.

Ms Pollard said: “That means that if you inherit an estate with a value of £326,000, you’d only pay 40 percent tax on the £1,000 that was over the threshold. So, you’d pay £400 in inheritance tax.”

However, Ms Pollard noted that the rules were a “bit different” for married couples and registered civil partners.

She added: “Married or registered civil partners do not have to pay any inheritance tax on any asset, money or valuable, left by their spouse.

“When the second partner passed away, the estate then qualifies for something called a married couple’s ‘transferable allowance’.

“This is essentially the Inheritance Tax threshold times two, for two people, and it currently stands at £650,000 – but only if none of the thresholds has been previously used.”

This means that whoever inherits the estate would only pay tax on anything over the value of £650,000 and this is known as the Transferable Nil Rate Band (TNRB).

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Ms Pollarded warned that this is sadly not the same for cohabiting couples.

She added: “At this time, there is no specific Inheritance Tax allowance or exemption for cohabiting couples.

“If you’re not married, but own assets jointly, the situation can get complicated, especially where property is concerned.”

Ms Pollard explained that joint tenants, where both people own all of the property, will still have to pay the 40 percent tax if the other person dies and their assets are more than the threshold.

However, after someone’s partner has passed away, the property would then be owned by the other in its entirety if it was written in a will.

She added: “If there was no will, the property can still be transferred to you through the ‘right of survivorship’ and the same Inheritance Tax rules would apply.

“However, without a Will, any family members of your partner would have a right to claim their share of other assets left, but they’d also then pay their share of any potential tax bill.”

Ms Pollard highlighted that people are several types of gifts which a person can give in their lifetime without inheritance tax having to be paid.

These include gifts to someone’s spouse or civil partner, gifts to charities, and payments to help an elderly relative or minor with living costs.

According to the rules, all adults can give away a maximum of £3,000 every year without paying tax on it. This is known as a person’s “annual exemption”.

Couples can combine their allowances which means they can give away £6,000 without paying tax.

People can also give as many gifts of up to £250 per person as they want each tax year, as long as they have not benefited from the £3,000 limit.

Ms Pollard added: “Also, when a couple marries some family members are allowed to give wedding gifts and these are exempt from potential Inheritance Tax at any point in time.

“Parents can gift cash up to £5,000 and Grandparents can gift up to £2,500 each.”

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