Marriage and Financial Planning
Love is in the air, with the royal wedding fast approaching and social media flooded with friends getting married and posts about wedding events I thought I would take a look at an overlooked bonus of marriage, the transferable nil rate band.
I often hear clients surprised that marriage can be beneficial for inheritance tax planning, there are also misconceptions regarding inheritance tax and relationships that lead to a misunderstanding about the available allowance.
Firstly, lets clear up the myth surrounding “common law marriage” – no matter how long you have lived with somebody, how many children you have together or how intertwined your finances, UK law and the tax man will not recognise your relationship as anything more than co-habitation without you putting your relationship on a formal ground through marriage or civil partnership.
So what is to gain from being married or in a civil partnership?
A lot of couples wish to benefit one another first (either absolutely or by way of a life interest) and then other beneficiaries such as children once both have died.
If a married couple or a couple in a civil partnership do this they have a transferable nil rate band. If a spouse leaves everything to their husband or wife the estate passes tax free on first death, also the unused nil rate band of the first to die passes to the survivor to use. Meaning that on the death of the second to die potentially £650,000 can pass tax free (or up to £900,000 if residence nil rate band is available.)
However, if an unmarried couple do the same the nil rate band of the first to die can be used up on the assets passing to the survivor meaning that on the death of the unmarried partner only one nil rate band is available. One person’s nil rate band is presently £325,000 (or £450,000 if residence nil rate band is available).
Whilst the first thoughts of those getting married this summer will probably not be about the inheritance tax savings, the ability to leave up to a further £130,000* to beneficiaries rather than HMRC on the death of the second may make the cost of the wedding more palatable!
40% of £325,000