Inheritance tax ‘rules to know’ for cohabiting couples – how to avoid a big bill | Personal finance | Finance

Due to inflationary pressures and rising property prices, more and more people are expected to pay tax, with the Office for Budget Responsibility (OBR) predicting that around 6.5% of estates could be subject to inheritance tax by 2026. tax, Heather Pollard, head of underwriting at Tower Street Finance, highlights the important things people need to know about this.

Ms Pollard said: ‘When someone dies and their will is read, finding out they left you some money or valuables can be a great discovery during an otherwise difficult and upsetting time.

“However, the probate process, the legal part and the inheritance tax, the expensive part, is not always easy to understand, and there are a lot of steps and rules to be aware of.”

Inheritance tax is the tax that is levied on the value of a person’s estate upon their death, and estate refers to all of their property and valuables.

It also includes bank accounts, pensions, houses or other buildings, land, jewelry, vehicles, stocks, assets held in joint ownership and payments from insurance policies.

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

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

Ms Pollard said: ‘This means that if you inherit an estate worth £326,000 you will only pay 40 per cent tax on the £1,000 that is over the threshold. So you would pay £400 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 inheritance tax on any property, money or valuables left behind by their spouse.

“When the second partner dies, then the estate is eligible for what is called a married couple’s ‘portable allowance’.

“It’s basically the inheritance tax threshold multiplied by two, for two people, and it’s currently £650,000 – but only if neither threshold has been used before.”

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

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

She added: “At present, there is no specific relief or exemption from inheritance tax for cohabiting couples.

“If you are not married, but you have property in common, the situation can be complicated, especially in terms of property.”

Ms Pollard explained that joint tenants, where both people own the entire property, will still have to pay the 40% tax if the other person dies and their assets exceed the threshold.

However, after the death of someone’s partner, the property would then belong to the other in full if written in a will.

She added: ‘If there was no will, ownership can still pass to you via ‘right of survivorship’ and the same inheritance tax rules would apply.

“However, without a will, all of your partner’s family members would be entitled to claim their share of any other remaining assets, but they would also pay their share of any potential tax bill.”

Ms Pollard pointed out that there are several types of gifts a person can make during their lifetime without having to pay inheritance tax.

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

Under the rules, all adults can donate a maximum of £3,000 a year without paying tax. This is called a person’s “annual exemption”.

Couples can combine their allowances, meaning they can give £6,000 tax free.

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

Ms Pollard added: ‘In addition, when a couple marry, certain family members are permitted to give wedding gifts and these are exempt from potential inheritance tax at any time.

“Parents can donate up to £5,000 in cash and grandparents can donate up to £2,500 each.”

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