The tax advantages of getting married
Marriage or civil partnerships, in the eyes of the law makes a large difference to a couple’s financial status. If you just live together, you could lose out on inheritance tax mitigation strategies, even if you have been partners for a long period of time. The only advantage that you could get if you are not married or in a civil partnership is you can claim one property each as your main residence. This means that on the sale of a second property there would be no capital gains tax applied as the second property could be classified as a main residence. Some of the tax advantages of getting married are as follows.
Marriage or civil partnerships become important in the probable event that one of you passes first. If all of the assets pass on to your spouse or civil partner it will be free of IHT. In addition, they will take any unused portion of the nil rate band for future use. This wouldn’t apply if you aren’t married or in a civil partnership. In an example, radio one presenter Steve Hewlett married his partner Rachael as he was terminally ill so that all of his assets would pass on to her free of any inheritance tax charges.
If you do not have a will and are married or in a civil partnership, then your partner would automatically receive some of your estate, but if you aren’t then they would not automatically receive any assets. It will skip your unmarried partner and will follow the rules of intestacy, which will pass the assets to your family according to certain rules.
Other benefits of being married or being in a civil partnership include being able to make lifetime gifts to your partner without IHT or capital gains tax, making it the easiest way for assets to be arranged in the most tax effective way. On the occasion of a wedding cash gifts can be given up to £1,000 per person as well as being able to give gifts of up to £5,000 to your children and £2,500 to your grandchildren without the worry of IHT.
You also have the ability to easily claim against your married partners will if they haven’t made reasonable financial provision for you in the will, as you won’t have to prove your relationship has lasted for more than 2 years or financial dependence from your partner. If you aren’t married then you will be struck by the disadvantages of inheritance taxation.
Although there are many ways around getting around inheritance tax if you are not married, it is easier and more cost efficient if you are and your family would benefit more after death from it. These are just some of the tax advantages of getting married.
For any advice regarding this matter, do not hesitate to contact our experienced financial advisers.
Why do you need both a will and a trust?
The reason you would make a will is so you have clear knowledge and clarity of whom and where your money and assets are going to go after your death with minimum delay and charges. Although these are good intentions, you may not have considered all of the ‘what ifs’ which would affect those receiving the inheritance by a will. Not addressing any inheritance tax charges or delays places a big burden on the beneficiaries prior to receiving the inheritance.
Potential questions or ‘what ifs’ of the question ‘why do you need both a will and a trust? that you should consider are:
- What if your spouse remarries after being widowed?
Legally, the new spouse is likely to benefit from their death, which could lead onto your grandchildren’s inheritance to be taken away/disinherited.
- What if your beneficiaries were to become divorced or separated?
Then your estate could end up being left to people who you may have never met before.
- What if your beneficiaries were to suffer financial hardship?
Creditors have the right to seize the inheritance that they could have benefited from.
- What if a beneficiary is reliant on state benefits?
If you leave them money through a trust, then that money wouldn’t fall under your estate and then wouldn’t be considered for IHT reasons.
- What if a beneficiary isn’t sensible enough with money to receive their inheritance?
It is possible for them to receive the inheritance in stages as long as the money is being supervised by someone who is trusted. You may choose to do this if the beneficiary struggles to handle money or has gambling or drug addictions, to reduce the likelihood of more addictions.
- What if your will is challenged?
Under the ‘Provision for family and dependants act 1975’ the only people which would be able to challenge your will are those who have been disinherited fully or left only ‘unreasonable provision’. However, if you form a trust then it makes it much more difficult for anyone to be able to make a challenge. The trust would only be given to those named before your death and there is no need to change ownership as all of the assets would go to the beneficiaries named.
- What if the beneficiaries cannot pay inheritance tax straight away?
Even if your assets are given to a trust before death, it doesn’t necessarily mean you will avoid inheritance tax but it does mean you can avoid probate and the trusts beneficiaries can access the assets immediately.
- What if, after receiving a large estate minus death duties the beneficiary dies prematurely?
Leaving assets to someone by a trust means those assets will never be accounted in the beneficiaries personal assets, meaning you can pass it on through generations for as long as the trust goes on for (usually 120 years), reducing IHT for them in the future.
Those are some answers to the questions regarding ‘why do you need both a will and a trust?’.
If you have any more questions regarding ‘why do you need both a will and a trust?’, do not hesitate to contact us and we will be more than happy to give you the best experienced advice.
Making gifts from your income to avoid inheritance tax
One question which always gets asked: How can I reduce inheritance tax on my estate when all my capital is tied up?
One answer to that question is that if you can afford it then you can make lifetime gifts of capital. This is one of the most effective IHT planning strategies. But what can be done when a chargeable estate cannot be transferred because of other taxation or practical reasons?
If you are in this situation and have already made use of the annual and small gift exemptions then you might be limited to only being able to make a gift of capital, which is gifts from your income and then hope to survive the dates of making the gifts by at least 7 years so that the gifts will fall out of the estate at death for IHT reasons. This gift can be made directly and so is classified as a potentially exempt transfer (PET) or a gift into trust which is classified as a chargeable lifetime transfer. The two types of gifts are taxed in different ways so experienced advice is required.
To be able to improve this position, you can arrange affairs so that the exemption for ‘normal expenditure out of income’ can be claimed on death. This is done by making gifts from your income that you consider you do not need to maintain your standard of living.
For you to be able to qualify then your expenditure must be normal or habitual, it must be made out of income and after all outgoing costs, including the transfers, you must be able to demonstrate that there is no change in your standard of living.
Should you decide to use these gifts out of income method, it is essential the intention to make the gift regular and habitual is recorded. This could mean using standing order arrangements or a letter of intention for gifts that are made annually. In addition, the gifts should be of the same value as the regular payments that are made and should there be any changes to the amount gifted the reason for the change must be recorded.
To determine whether the second and third conditions have been met, HMRC expect your trustees or executors to give a lot of detail of your income and expenditure in the years before your death which would be entered on the IHT form 403. Income includes all forms of income whether it is taxable or not.
The expenses will include amounts which can be easily determined for example, mortgage or utility bills but will also include items which cannot be easily determined such as holidays or travel. The surplus of income over expenditure is then compared to the value of gifts which the exemption is being claimed to determine whether the gifts were made out of income rather than capital.
If you hope for the estate to benefit from the exemption then you must keep everything well documented to ensure the personal representatives have the best chance of success and don’t submit an incorrect claim.
Like all IHT planning it is essential to get experienced advice before starting any inheritance tax mitigation planning. Please call us for help and advice in this area.