Understanding Inheritance Tax: A Guide to Leaving Assets to Your Spouse

Inheritance tax presents a complex challenge, particularly for those concerned with providing for their spouse or partner following their passing. While married couples or civil partners can bequeath their property or finances to their significant other without the burden of inheritance tax, cohabiting couples must exercise greater vigilance.

The demise of one cohabiting partner results in the law treating the surviving partner as a stranger, potentially leaving them with a substantial 40 percent inheritance tax liability. This underscores the importance of proactive planning to potentially realise significant cost savings.

It is pertinent to highlight the array of tax benefits associated with leaving assets to a spouse. Notably, a home can be passed on without incurring inheritance tax, irrespective of the estate’s size. This presents an appealing avenue for individuals seeking to secure their loved one’s financial stability upon their passing.

Conversely, the regulations differ for long-term partners lacking the legal status of marriage or civil partnership. In such instances, cohabiting couples may face increased inheritance tax liabilities, potentially resulting in the surviving partner receiving a lesser amount than intended.

In line with recent data from HMRC, inheritance tax receipts climbed to £5.7 billion between April and December 2023, marking a £0.4 billion surge in comparison to the same period in 2022. It is anticipated that the total figure for the fiscal year will surpass the £7.1 billion recorded in the preceding year.

Moreover, only a small percentage of deaths lead to an inheritance tax obligation. During 2020-21, roughly four percent of deaths in the UK (27,000 estates) incurred an inheritance tax bill. Nevertheless, with thresholds frozen and property values continuing to rise, the risk of inheritance tax affecting more individuals in the future is heightened.

In navigating these challenges, cohabiting couples are recommended to explore the advantages of a civil partnership, an equally valid alternative to marriage that can alleviate the hefty 40 percent inheritance tax. Forward planning, executing a will, and leveraging gifting allowances, among other strategies, can assist in minimising future inheritance tax liabilities. Expert legal counsel is essential when considering these options.

Ultimately, comprehending the inheritance tax regulations and undertaking proactive planning can significantly contribute to ensuring the well-being of loved ones after one’s passing. With the appropriate approach and guidance, it is feasible to safeguard one’s assets and reduce the impact of inheritance tax on the estate.