Living together; the inheritance tax trap

Image of Living together; the inheritance tax trap

By Leah Duffield, Solicitor: Wills, probate and trusts
Losing a loved one is devastating at any time, but imagine if at the same time as dealing with that grief, you had to find the funds a pay a large inheritance tax bill, potentially through selling your much loved family home.

This is a situation that many co-habiting couples and long term platonic co-habitees, such as siblings, find themselves in. Whilst married couples and civil partners are protected from paying inheritance tax on assets passing directly to them, no such exemption applies to those who are unmarried regardless of how committed they are to each other.

Tax sensitive co-habiting couples may be tempted to marry to avoid a large tax bill, however many consider it distinctly unfair that the government imposes an essentially religious commitment on those who may have moral or personal objections to entering into such an arrangement.

For co-habiting couples in this situation, there may be a solution ahead. In a recent supreme court judgement  it was found that limiting the Civil Partnership Act 2004 to same-sex couples only was incompatible with the European Convention on Humans Rights. This decision could pave the way for a change in the law to allow co-habiting mixed-sex couples to enter into a legally binding commitment to each other free of the religious connotations of marriage. This, in turn, will allow them to benefit from the government exemption to inheritance tax allowed to spouses and civil partners.

Whilst this judgement has been welcomed by many as a long overdue acknowledgement of the government’s preference shown to married couple and their disregard the many happily co-habiting couples in this country, spare a thought for those to whom marriage or civil partnership is an impossibility.

Many family members and friends choose to share their lives, and homes with each other, taking solace in the companionship and comfort of their loved ones. In particular where siblings are concerned, there is currently no legal commitment they can show to each other to allow them to benefit from inheritance tax savings on the first to die. This means that it is possible that when one sibling dies the family home, which has very often been in the family for generations, will need to be sold to pay the tax on the deceased’s sibling’s share. This leaves the surviving sibling facing an uncertain future in respect of both housing and their finances.

Co-habitees in this situation are not arguing that inheritance tax shouldn’t be payable at all, only that it could be deferred until both or all co-habitees die, in the same way that it is delayed for spouses and civil partners. It does not decrease the amount of tax the government receives, only ensures that it is only paid when all co-habitees have passed away and there are ready funds to pay the tax due.

Despite regular appeals to the government to address this issue, no steps have been taken to introduce a solution and it remains to be seen what the future holds for those affected.