Inheritance Tax: Millions Missing ‘Major Tax Benefits’ and Risk a Big Bill | Personal finance | Finance

Death is not a topic that many couples like to discuss, especially when they think they have many years left in them. Unfortunately, this is something they need to talk to each other, especially if they believe they are in a committed relationship. Few cohabiting couples would view living together as a potential source of vulnerability, but when it comes to inheritance rights, it is. If a couple is not married or in a civil partnership, they do not have the same legal rights to property, money or other assets such as pensions as those who are.

So if one partner dies, the other could be placed in a financially vulnerable position, as under inheritance tax rules they are not classed as direct family.

The total number of cohabiting couples in 2020 was around 3.5 million, up from 1.5 million in 1996, according to a House of Commons Library backgrounder.

Inheritance tax usually has to be paid within six months, which means surviving partners may be forced to sell their homes while they grieve.

Many believe in the myth that a “common-law partner” will have automatic rights to a person’s property and assets, but this is not true.

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This means couples can leave entire property to their surviving partner at no cost.

However, there is no exemption for couples who only cohabit.

Currently, the inheritance tax threshold or zero rate band has been frozen at £325,000 since 2009.

This threshold also applies to each individual.

If the value of an estate is less than this value, a person does not have to pay inheritance tax. If more, it will be taxed at a rate of 40 percent.

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In addition to the Principal Allowance, there is a transferable Principal Residence Allowance which is £175,000.

This allows people to leave a lot more if the estate includes property that is left to direct descendants such as children, grandchildren and stepchildren.

The allowance essentially increases the allowance without IHT to £500,000 for most people.

This means that married couples, who jointly own a property, can leave it to their children as the full inheritance tax exemption will be £1million.

A surviving partner can also apply the person’s unused zero-rated portion to their estate.

This means that a surviving partner could essentially double their threshold if they meet other criteria.

Alex Davies, CEO and Founder of Wealth Club, said: “The homes of unmarried couples could be subject to inheritance tax on the death of one of the partners.

“Cohabitants need to think seriously about how they approach this problem.

“While marriage is not for everyone, it can offer significant tax advantages and married couples can bequeath everything to their surviving spouse without having to pay inheritance tax.”

It is recommended that cohabiting couples write a detailed will that explains what the deceased wants when they die, but this will not protect the partner left behind from an inheritance tax bill.

Discussions between the partners must take place in order to fully understand the position in which they find themselves and what can be done about it.

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