Inheritance tax is often associated with married couples and families, but what about single individuals, cohabiting couples or people who don’t have any children? There seems to be a misconception that only those in ‘traditional’ family structures are affected by inheritance tax.

However, in today’s society, there are more single people than in previous generations, more couples choosing to cohabit long term rather than get married, and more couples choosing to remain childless. There’s even a slang phrase to the latter – DINK (dual income, no kids).

What’s more, DINKs and single people are often far wealthier with more disposable income than their parent counterparts, partly because they don’t have all the added expenses that come with raising children.

Singletons and unmarried couples are discriminated against in inheritance tax regulations

If this is you, by the time you’re ready to retire, you may have a property valued over a million and accumulated significant wealth in savings and other investments. Without taking measures to mitigate the inheritance tax burden, your beneficiaries could find themselves facing a hefty bill from HMRC. Therefore, it’s important you understand the tax implications of passing your wealth on to an unmarried partner or indirect descendants.

Overview of inheritance tax

Recent news coverage has blasted inheritance tax as the most hated tax in Britain, but in reality, it’s a tax that hardly anyone pays. In fact, only one in twenty estates incur inheritance tax.

More than a third of people who die leave everything to a spouse or civil partner, which is exempt from taxation. Then, when the surviving partner dies, their inheritance tax allowances are combined, giving their direct family a potential £1 million threshold before any tax is due.

Unfortunately, these exemptions do not extend to single individuals or unmarried couples.

Inheritance tax for singletons or unmarried couples vs. married couples

The disparity in taxation for singletons and unmarried couples reveals massive discrimination in inheritance tax regulations.

If you’re married, you can pass on all your wealth to your spouse or civil partner completely tax-free, regardless of how much money you have or how many properties you own.

In contrast, if you’re single or unmarried, your tax-free allowance is limited to £325,000. That means that even if you’re in a long-term relationship but aren’t in a marriage or civil partnership, your other half could find themselves facing a hefty 40% tax bill on anything they inherit from you above £325,000.

Couple in enjoying a coffee together

Inheritance tax for nephews and nieces

In addition, if you have children and grandchildren, and they inherit your estate, they’ll benefit from an additional £175,000 tax relief on the family home, technically called ‘main residence’ relief. But if you don’t have any direct descendants, anyone who inherits your estate won’t qualify for the additional relief, meaning they’ll have to pay more tax.

That means children, grandchildren, and great-grandchildren receive the additional threshold. But it does not apply to nieces and nephews, brothers and sisters, cousins, aunts, uncles, or anyone not directly descended from you.

The discriminatory nature of inheritance tax rules often results in a double burden for childless, unmarried couples and singletons. Adding the £175,000 main residence relief to the £325,000 IHT relief makes £500,000 free of tax for descendants. And if you double that for the heirs of widows, you reach the magical figure of £1 million, which can be left entirely free of inheritance tax by a widow to a child or grandchild.

Planning considerations

Understanding how inheritance tax is likely to affect the people you want to leave your money to is essential for effective estate planning, especially if you’re unmarried, single or childless.

By seeking professional advice and exploring personalised planning strategies, you can take advantage of trusts and tax wrappers, such as a pension, to relieve the tax burden and ensure a smooth transfer of assets to your chosen beneficiaries.

For more steps to reduce IHT on your estate, see How much money can I leave without an inheritance tax bill?

Amber River Financial Planning

Amber River’s independent advisers are specialists in estate planning and inheritance tax and can help you take proactive steps today to protect more of your legacy from tax.

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Amber River has a network of Chartered financial planners right across the UK, ready to offer truly independent advice. If you want to set up an initial appointment, call 0800 915 0000, or alternatively use our contact form here.