IHT Savings for Unmarried Partners

Most Will Writing companies (including ours) tend to concentrate on IHT mitigation for married couples. The reason being that unmarried couples have to pay any tax due after the first death – because this is unavoidable we have often neglected the savings that may be possible with discretionary trusts that can still be used irrespective of marital status. All the examples below use the IHT exemption level of £275,000 announced in the Budget for 2005/2006.

Example 1. Derek and Jane are unmarried partners and have bought a house as joint tenants which is valued at £350,000. Additionally Derek is a sole owner of a holiday home valued at £175,000; he also has bank accounts and equities valued at £100,000. If Derek dies first there is no IHT pay. He would like Jane to have the use of his assets for the rest of her life but leaving her his estate would create an IHT burden when she dies (£350,000 x 40% = £140,000 tax to pay).

With a Discretionary IHT Trust in his Will, if Derek dies first, Jane can use the assets of his estate if needed and after her death the value of the trust can pass to the children of Derek’s earlier marriage. If Jane borrows £75,000 from the trust during her lifetime this will create a debt on her estate so that when she dies no IHT is due.

Questions arising: What happens if Jane dies first? Is there still a way to save IHT? What happens if the house is owned as Tennants in Common?

Example 2. Unmarried partners Edward and Melinda ran their own separate businesses before retirement. Edward’s assets are worth £400,000 and Melinda’s assets amount to £345,000. If Edward dies first IHT to be paid = £50,000 and if Melinda dies first tax to be paid = £28,000. Although these are substantial amounts of tax they are preferable to the amount that would be due on their combined estates after the second death (£188,000). Both Edward and Melinda want the next generation to benefit from their Wills so putting Discretionary IHT Trusts in both their Wills ensures a tax saving of £110,000

Example 3. Before they set up home together, Jack and Mary agreed that, because they both had generous occupational pensions, their individual estates would go directly to children they’d both had from earlier relationships. Both Jack and Mary have personal assets worth about £250,000.

When the first partner dies the survivor has adequate resources in their own right. So both partners can give their entire estates to their respective children without any IHT being due. This is a case where a Discretionary Trust would NOT be appropriate even though there would be a tax burden created if the estates were combined.

Also see our information about standard IHT Estate Planning issues.