Personal finance expert told cohabiting couples about the significant inheritance tax disadvantages they face
A personal finance expert has issued a stark warning to couples living together. Speaking on his BBC podcast, Martin Lewis shared the story of a remarkable encounter with a taxi driver on his way to the studio.
The dad-of-one said that the driver, known as Joe, proudly showed his wedding ring and explained that he and his partner had got married because of the Money Saving Expert founder. The reason was inheritance tax – and he explained how he had let his wife listen to the relevant Martin Lewis podcast, which showed how much their children would miss out on if they died without being married.
Mr Lewis said in the wake of his encounter: “I thought it might be worth explaining to you what the benefit of marriage within the inheritance tax world is, and it’s actually pretty substantial. When we talk about marriage, it applies to anyone who is married or who has a legal civil partnership.
“But this does not apply to you if you are just cohabiting. That was the thing with Soho Joe, the taxi driver; he and his partner had been cohabiting for 33 years, but they didn’t have any legal representation of their relationship.
“A legal recognition of your relationship and civil partnership is also a legal recognition of your relationship without some of the, some might say, paternalistic religious overhang that a marriage has.”
Martin Lewis’ 2 big inheritance tax marriage benefits:
- Assets left to your husband or wife aren’t taxed
- You pass on your inheritance tax allowance to your spouse – which then goes to your children.
Mr Lewis explained: “So the two big inheritance tax benefits. First of all your spouse won’t pay inheritance tax on anything you leave to them. When you die any money, any property, any assets left to your spouse is automatically exempt from inheritance tax.
“An even more important inheritance tax boon of marriage is you can pass on your unused inheritance tax balance to your spouse. So in plainspeak you don’t pay inheritance tax on the first £325,000 you leave when you die. Above that if you’re leaving your main residence to your direct descendents, so your children or grandchildren or step children, you usually get another £175,000 on top. So that’s £500,000 that you can leave without paying tax on it.
“So if you leave everything to your spouse when you die, then you haven’t used any of those allowances and as they’re unused they get passed on to your spouse. That means when your spouse passes away their allowance and yours, which means if you’re leaving the main property, they can then leave a million pounds they can pass on without paying any inheritance tax. That’s a huge benefit.
“And that’s why it’s often worth looking at getting married or a civil partnership which counts in exactly the same way.” The personal finance expert said that a good example was in a case where two people had £1 million in assets including a property. He said: “When the first one of you dies if you’re not married you leave everything to the other one. Well you’ve just used, because your stuff is worth £500,000, £500,000 of your inheritance allowance. So you have no allowance to pass on to them.
“Your partner now has a million pounds worth of assets when they die their inheritance tax allowance is £500,000. So if they pass that on to your child that’s £500,000 which would pay inheritance tax at 40 per cent which is a £200,000 inheritance tax bill.
“Let’s contrast that to our married couple who have a million pounds worth of assets. The first one dies, all their assets go to their spouse. Their unused inheritance tax allowance goes to their spouse because they’re passing it to a spouse it didn’t count.
“So then when the second one dies they get to leave the entire million pounds to their children inheritance tax free. Saving £200,000.”
To listen to the podcast in full click here.
