If you are married or in a civil partnership, you can leave your entire estate to your spouse and there would be no inheritance tax to pay
Martin Lewis has issued an inheritance tax warning to couples that live together but are not married.
If you are married or in a civil partnership, you can leave your entire estate to your spouse and there would be no inheritance tax to pay.
However, if you are co-habiting, you would be subject to the normal inheritance tax allowances – even if you have been a couple for decades.
The standard rate of inheritance tax is 40%. Inheritance tax is due if the value of your estate is above £325,000. You would pay 40% tax on the value of your estate above this value.
You can get an additional allowance of £175,000 if you are leaving your home, providing it is your main residence, to your children or grandchildren.
Martin Lewis explained the benefits of being married for inheritance tax purposes during the latest episode of his Martin Lewis Money Show Live on ITV, using a fictional couple called Hal and Lou.
He said: “Hal is, at the moment, a single man. If Hal were to pass away, as a single man, his estate could leave £325,000 without any inheritance tax paid on it. Anything above that would be paid at 40%.
“But if Hal has direct descendants… then if Hal is leaving his main residence to them, he gets a further £175,000. So the maximum single person allowance in your estate when you die is £500,000.
“Hal is married to the wonderful Lou… together they are lucky enough to have £1million of combined assets. Now, there are two crucial marriage rules you need to understand when it comes to inheritance tax.
“The first thing is, there is no inheritance tax on anything left between spouses – if you’re married, civil partner, not just living together.
“The second rule, you can leave any unused allowance to your spouse, married or civil partner owner. Let’s play through this scenario again. Hal has his allowance there. Lou also has the same allowance.
“Now, the sad news is, Hal passes away. He leaves everything to Lou, so there is no inheritance tax to pay and his allowance is unused.
“Lou now has Hal’s allowance, as well as her own. She’s got £650,000 she can leave straight and £350,000 that she can leave to direct descendants on a house.
“So that means together, their £1million assets, assuming they are leaving them to direct descendants, is totally free of inheritance tax.”
Martin changed the scenario so that Hal and Lou had been together for 30 years, but were never married – and explained how this could cost them hundreds of thousands of pounds in inheritance tax.
He said: “Let’s take this back and imagine Hal and Lou have been together 30 years but they’re not married. They both have their own individual allowances. They love each other, they live in the same residence.
“Hal is leaving everything to Lou. Hal passes away. The first thing, he isn’t getting his £175,000 allowance because he has to leave his house to Lou as she has to live in it. So his estate will pay 40% tax on £175,000, that’s about £70,000.
“Everything else is left to Lou, but he uses his £325,000 allowance to do it, because they’re not married… Lou has £930,000, because the £70,000 is gone. She’s giving everything to the kids… there’s £440,000 that she is going to have to pay inheritance tax on at 40%.
“If we add the tax on that, to the tax that Hal paid, that is £240,000 of inheritance tax that the estate would pay that is not going to their children. If they had got married… it would be nothing.”
