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How Cohabiting Partners Can Save up to £130,000 Inheritance Tax

Transfers between unmarried couples are not exempt from Inheritance Tax (IHT) as they are for married couples or civil partners. This means that on first death IHT is due on the value of an estate over £325k including any inheritance left to the surviving partner. Furthermore, unlike married couples and civil partners, any unused Nil Rate Band on the first death is not transferable to the surviving partner. This means that IHT is due on the value of the surviving partner’s estate over £325k. With the transferable Nil Rate Band, a surviving spouse of a married couple or surviving partner of a civil partnership could benefit from an exemption of up to £650k.


An unmarried couple each have individual estates valued at £400,000; on first death, they leave everything to the surviving partner and on second death to their children.

Value of first estate £400,000
Less Nil Rate Band £325,000
Amount on which IHT is payable £75,000
IHT at 40% £30,000
Amount left for surviving partner £370,000
Value of second estate
(£400,000 + £370,000)
Less Nil Rate Band £325,000
Amount on which IHT is payable £445,000
IHT at 40% £178,000
Amount left for children £592,000
Total IHT paid £208,000

Minimising IHT for cohabiting partners

The total amount of IHT due can be minimised by placing an amount equal to the Nil Rate Band into a Discretionary Trust on the first death. This trust does not then become part of the surviving partner’s estate. The Discretionary Trust is set up for the benefit of the surviving partner and, usually, your children and grandchildren (even though they may not be born) with priority for your surviving partner and can be used to ensure that the surviving partner owns the family home outright.

Here is the above example reworked using a Nil Rate Band Discretionary Trust:

Value of first estate £400,000
Less Nil Rate Band £325,000
Amount on which IHT is payable £75,000
IHT at 40% £30,000
Net after IHT £370,000
Amount placed in NRB Trust £325,000
Amount left directly for surviving partner £45,000
Value of second estate
(£400,000 + £45,000)
(The NRB Trust is outside this estate)
Less Nil Rate Band £325,000
Amount on which IHT is payable £120,000
IHT at 40% £48,000
Amount left for children £397,000
Plus NRB Trust £325,000
Total amount left for children £712000
Total IHT paid £78,000
IHT Saving £130,000

As you can see, the IHT saving is considerable. A Nil Rate Band Discretionary Trust on first death yields IHT savings for unmarried couples with combined estates worth in excess of £325k; the maximum saving is £130k and is achieved on combined estates worth £650k or more.

For comparison, the total IHT paid by a married couple with a combined estate of £800k, as in the above example, would be £60k.

How the Nil Rate Band Discretionary Trust works

On the first death a Discretionary Trust is created. The beneficiaries of the trust are the surviving partner and usually your children and grandchildren (even if not born at the time). Being a Discretionary Trust, none of the beneficiaries are entitled to receive anything from the trust, payments being solely at the discretion of the trustees. However, the surviving partner is appointed as a trustee and thus has considerable influence on how the trust funds are applied as trustees have to act unanimously.

An amount equivalent to the IHT Nil Rate Band is placed in the trust. To enable the surviving partner to benefit from those assets immediately, the trustees are empowered to either accept an IOU from the surviving partner to the value of the assets or to place a charge to that value on property transferred to the surviving partner. The trust has effectively loaned the assets to the surviving partner and the trust’s assets are the IOU or charge over property.

On the second death, the loan is repaid to the trust from the surviving partner’s estate and is not therefore assessed as part of that estate for IHT. The trust is then distributed to the ultimate beneficiaries, usually your children.

There are some important points to note:

  • Only assets that are owned individually can be place in the trust. Jointly owned assets such as bank accounts pass automatically to the surviving owner(s) outside of the Will and cannot therefore be placed in the trust. Your home probably forms a substantial proportion of your assets. You should ensure that you own your property as Tenants in Common which means that you each own 50% of the property individually so that your share can be included in the trust. Most homes are owned as Joint Tenants in which the owners do not have an individual share. I can check how your property is owned and, if required, convert this to Tenants in Common, a process known as “Severing the Tenancy”.

  • You should arrange to hold your assets as equally as possible to use the Nil Rate Band to best effect.

  • The trust will be subject to taxation but this is insignificant compared to the IHT saving made.

  • Because of the complexity of trust legislation, I strongly recommend that you appoint a professional executor to set up the trust.

  • The surviving partner will be a trustee but cannot be the sole trustee. I recommend that you keep additional trustees to a minimum and that one of the additional trustees, if not the only additional trustee, should be a professional.

What happens later if you marry or register a civil partnership?

Marriage and civil partnership registration automatically revokes a Will unless it contains a clause stating that the Will was written in contemplation of that marriage or civil partnership. If your Will is written in this way then it remains valid as does the Nil Rate Band Discretionary Trust. Without that clause, the Will becomes invalid and you should write a new Will.

There are some potential advantages in retaining the trust within the Wills even after getting married or registering a civil partnership:

  • It protects the inheritance for your children in the event that the surviving partner remarries or registers a new civil partnership as this automatically revokes their Will and would inadvertently disinherit your children.

  • It can protect those assets from being sold to pay for long term care of the surviving partner.

  • It can protect those assets from other financial difficulties such as bankruptcy.

With or without the Nil Rate Band Discretionary Trust in your Wills, you will benefit from the spouse or civil partner exemption meaning that anything you transfer to your spouse or civil partner will be exempt from IHT. Furthermore, any unused Nil Rate Band from the estate of first spouse or partner can be claimed by the survivor. This would provide an additional £18,000 IHT saving in the example above.

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