Tax mitigation by marriage

Getting married has become increasingly out of fashion. The number of people marrying per 1000 people in the UK declined from 36/1000 in 1991 to 19/1000 by 2017. However, there was a significant increase in 2021 and 2022, with many more marriages taking place than in the pre-pandemic years.

Whether a couple are married or not determines what happens to their assets on death. Many people in the UK without a Will may rely on various misconceptions around co-habitation, marriage, succession and estate planning.

Under English succession law and the inheritance tax provisions, common law marriage is not a legally recognised status. This applies even when couples have lived together for many years “as husband and wife”, with their lives and assets fully intertwined.

Clients who have not officially married or entered into a civil partnership are often surprised to find their assets do not automatically pass to the survivor of them on the first death.

How the assets pass depends on how the assets are owned.  Anything in joint names held as “Joint Tenants” (where you are both entitled to the whole of the asset) passes automatically to the survivor on the first death, not under the terms of a Will.

Assets held as “Tenants in Common” (as separate shares), held in equal or unequal proportions, will pass in accordance with the deceased’s Will or under the rules set out in the Administration of Estates Act, known as the intestacy provisions, if no Will can be found.

The intestacy provisions do not recognise common law husbands and wives and as a result assets could end up passing in their entirety to other relations of the deceased, such as children, parents, siblings and their children.

Assets passing to unmarried partners will be subject to Inheritance Tax on the deceased’s death. They may also be subject to Inheritance Tax on the survivor’s death before being passed onto the beneficiaries, meaning that assets could be subject to Inheritance Tax twice, because the spouse exemption does not apply to unmarried couples.

These situations can be stressful and costly to resolve at an already incredibly difficult time for the individuals involved.

The easiest solution is to ensure you have prepared a Will leaving your estate to your chosen beneficiaries and that you have received advice on the taxation on the estate.

Clients often believe that because they are married, all their assets pass to their spouse and therefore they do not need a Will.  This is only correct if the deceased had no children.

As mentioned above, if you die without a Will, then the intestacy provisions set out how your estate will be distributed.  If on your death, you have a surviving spouse or civil partner and children, then your estate will be distributed between them.  This excludes joint assets that pass by survivorship, as mentioned above, or nominated assets, see below. 

Your spouse or civil partner will inherit the first £270,000 (called the statutory legacy) and all of your personal belongings.  The remainder of the estate is then split in half, with one half to the children equally, on them attaining the age of 18 years, and the other half to the surviving spouse or civil partner.  If the children are under 18, a bereaved minor trust arises which can be expensive to administer and is quite restrictive.

If a Will leaves the whole estate to a spouse, the whole estate is spouse exempt and no inheritance tax is payable.  If there is no Will, and children inherit under the intestacy provisions, there may be an unexpected Inheritance Tax charge payable on the first death, depending on the value of the assets in the estate.

Many life policies, pensions and death in service schemes pay a capital lump sum on death.  Such lump sums can be nominated to beneficiaries by way of a nomination form or letter of wishes supplied by the policy or pension provider.  The lump sum then passes outside of a Will on death.   

The rules regarding ongoing “widow’s” pension payments to the survivor of a couple are evolving to include unmarried long term partners, but this is still in the discretion of most pension and life policy companies and should not be taken for granted.

For some, more wealth passes via their nominated life policies and pensions, and by survivorship for joint assets (often the family home), than under the terms of their Will. 

As a result of all of the above, solicitors can find themselves in the awkward position of advising unmarried couples to marry, if only to take advantage of the spouse exemption to save inheritance tax.

Carly Argent is a Senior Associate in the Private Client Team in Putney. Carly advises on wills for elderly clients, single people, married couples and civil partners as well as offering advice on tax planning and lasting powers of attorney. She also acts for executors and trustees primarily based in the UK on a wide variety of tax, trust, succession and estate planning issues.