Too many couples fail to realise the danger until it is too late, assuming the law will protect them when it won’t. Campaigners say this has to change.
Michelle Tucker, 53 and long-term partner Steve Douglas lived together for 11 years with their son Theo, 10.
They were not married when Steve died suddenly of atherosclerosis at the age of 57 in May this year. Heartbreakingly, their wedding was planned for August.
This plunged Michelle into financial chaos.
The couple bought a house in north London in 2016 and she now faces a huge inheritance tax bill on Steve’s share of the property.
Michelle says: “On top of grieving for my partner and being the sole carer for my grieving son, I now have to focus on not becoming homeless due to an unfair, harsh and old-fashioned tax rule.”
IHT is the UK’s most hated tax as it is charged at a punitive 40 percent on assets above £325,000.
When a spouse or civil partner dies, their partner can inherit their £325,000 nil-rate threshold, plus the £175,000 main residence allowance for family homes.
Yet if the couple is unmarried, they do not benefit from a tax-free “spousal transfer”. Any of Steve’s assets above £325,000 are instantly liable for IHT and Michelle now has to find a staggering £157,000.
“I have to find an extortionate amount of money to stay in our family home, simple because we were not married. It seems discriminatory and iniquitous.”
In July, the DWP confirmed that it would extend widows parent’s allowance and bereavement support payments to cohabiting partners with children.
Yet last month, Ministers rejected a call by the Women and Equalities Committee to extend the IHT treatment of spouses and civil partners to cohabiting partners.
This is a growing issue as seven million Britons now cohabit. While many are young, a growing number are older couples who found love following death or divorce.
Many do not wish to make their live-in relationship official either because of past disappointment or because children disapprove, said Paul Wilcox, founder of wealth planners WAY Group. “Denying long-term and devoted couples who failed to formalise their relationship IHT relief on joint assets when one dies is unfair.”
Couples often confuse common law partners with civil partners, said Victoria Cannon, partner at Stowe Family Law. “Civil partners have the same rights as married couples, but cohabiting couples have no legal status and a common law marriage does not exist.”
Cannon urged Michelle to seek urgent legal advice. “She must ensure all IHT exemptions have been considered and the trust interpreted correctly.”
READ MORE: Inheritance tax ‘unfair’ rules set to hit couples with 40% bill
While Michelle cannot claim the IHT spousal exemption, she may benefit from other reliefs and should take advice, said Stevie Heafford, partner at accountancy firm HW Fisher. “Depending on the trust, the £325,000 nil-rate band could be available, and she should still be entitled to her own nil-rate band.”
Heafford said as the law stands, unmarried couples can do little to mitigate the impact of inheritance tax.
If marriage is not an option, she says consider civil partnership and making a will to ensure assets go to the right people. Make clear who is to inherit your pension, too, as this can be passed on free of tax if you die before age 75. Afterwards, beneficiaries may incur income tax on withdrawals.
Unmarried couples who want to pass assets between each other could make potentially exempt transfers, which are IHT free if the donor survives for another seven years. “Alternatively, put assets in trust,” Heafford said.
Also, consider taking out an insurance policy to pay a likely IHT bill, again, written in trust.
This is sound advice but too late for Michelle who wants the Government to support cohabiting couples. “Today’s laws are not fair or right. They must be changed to protect others from the nightmare I’m now facing.”