Passing on your wealth: your rights if you're married, cohabitating or have children

Your marital status and whether you have children have huge implications when you pass away.

Introduction

Whatever our finances, we all need to consider what will happen to our assets (or lack thereof) when we pass away.

Do you need to make a will? Does it make a difference if you’re not married? Will your family need to pay off your debts? What if you have children with a previous partner?

We've put together a guide to answer these questions.

Inheritance Tax: the basics

The amount of money and other assets you can leave behind when you die before incurring tax is determined by a strict set of guidelines known as Inheritance Tax (IHT). 

Under current rules, you can pass on up to £325,000 worth of assets (as a single person) or up to £650,000 (as a married couple) before your beneficiaries need to pay tax on their inheritance. This is known as your "nil-rate allowance".

Your beneficiaries will need to pay tax at a rate of £40% on any inheritance above these sums.

If your home counts as part of your estate, you'll qualify for an additional tax-free allowance of £100,000, which will increase in increments to £175,000 by the 2020/2021 tax year. This known as your "main residence allowance".

Your new allowance would equal £500,000 for a single person or £1,000,000 for a married couple.

Under current legislation, these rates and thresholds are frozen until 2021.

When deciding the value of your estate, your executors include:

• Cash savings
• Stocks and shares
• Property
• Cars and other vehicles
• Life insurance policies
• Pension pots
• Businesses

Click here for more on how to cut your Inheritance Tax bill

Marriage/civil partnerships

If you're married or in a registered civil partnership, the situation is normally relatively straightforward and you can typically leave your entire estate to your spouse free from IHT.

Imagine Helen is in a registered civil partnership with Jayne. Helen passes away and leaves an estate worth £750,000. Helen can pass this entire amount to Jayne free from IHT.

Helen can also leave her unused tax-free IHT allowance of £325,000 to Jayne. This means Jayne will have a tax-free allowance of £650,000 on her own estate when she passes away.

Marriage Allowance: how to get a £900 tax break

Cohabitating couples

If you're not married to your other half, but own assets such as a home together, the financial situation can be more complex – and expensive.

The law regards an unmarried couple as two single people when it comes to dividing money and property. In simple terms, this means the surviving partner will need to pay tax on any inheritance above the tax-free allowance.

Let's say Vanessa lives with Neil, but they aren't married. Vanessa passes away having left a will and bequeaths the entire value of her £450,000 estate to Neil. 

Because Neil and Vanessa were not married at the time of her death, he will need to pay tax on the £125,000 she has left him above the nil-rate band.

If your unmarried partner didn't leave a will, his or her family may also have the right to claim a portion of their assets, including savings, life insurance policies and pension pots.

Passing on property

For most of us, our homes are the biggest investment we'll ever make.

If you're married or in a civil partnership, you can normally leave any property to your partner free from IHT.

Or, should you leave your property to your direct descendants, they receive an additional £125,000 nil rate band (so £450,000 in total) before they have to pay IHT. That's the case regardless of relationship status.

However, when it comes to your partner, the situation can become far more complicated if you're not married, but own a property with them.

In this case, your legal position depends on whether you’re classed as "joint tenants" or "tenants in common".

Joint tenants: if you and your unmarried partner own your property equally, you’ll automatically inherit the property if your other half passes away.

Be aware, however, you’ll need to pay IHT on any inheritance above the £325,000 threshold.  Once you’ve done so, you’ll be classed as your home’s sole owner.

Tenants in common: if you're “tenants in common”, each of you will own a share of your home. When you pass away, your portion of the property is added to the overall value of your estate and left to the main beneficiaries of your will. Be aware, tenants in common also need to pay IHT on any inheritance above the £350,000 nil-rate band.

Leaving money to children

Be aware, your children (whether with a current or previous partner) will need to pay IHT tax on anything above the tax-free threshold.

Say you're a single parent and leave an estate of £500,000 to your children, they'll need to pay tax on anything above the nil-rate band. In our example, they would need to pay tax on £175,000 of their inheritance (less if it included property - see above).

Setting up a trust is often one of the most effective ways to reduce IHT and can also mean you have a say in how your beneficiaries use your assets.

Many parents of young children set up trusts if their offspring aren't ready to make sensible decisions about their finances. You could, for example, specify your children don't receive their inheritance until they reach a certain age or this money is ring-fenced for their educations or weddings.

When it comes to setting up a trust, there are typically three main people involved:

• The settler: the person who puts money into the trust
• The trustee: the individual responsible for making decisions over funds 
• The beneficiary: the person who receives money and assets 

There are a number of types of trusts, including:

• Bare: typically allow the beneficiary to access their inheritance when they reach 18 (in England and Wales) or 16 (in Scotland)
• Vulnerable person: normally established on behalf of a person with a disability or a child too young to make financial decisions
• Interest-in-possession: the beneficiary receives an immediate income, but can’t access the assets underlying the trust
• Discretionary: the trustees have total say over how assets are used
• Mixed trust: a combination of a number of the above types of trust

Alternately, you can use tax-free gift allowances to pass on your wealth.

Under the seven-year rule, any gifts made at least seven years before your death are exempt from IHT.

All UK residents have a yearly £3,000 tax-free allowance and you can also carry over any leftover allowance from one tax year to the next, with a limit of £6,000.

Inheritance Tax: should you give your kids their inheritance early?

Donating to a charity

Any gift you leave to a charity, university or political party won't qualify for IHT and can cut the overall bill on your estate.

By donating at least 10% of your money or assets to charity, you can cut the rate of IHT on your the remaining portion of your estate from 40% to 36%.

As well as helping good causes, this reduction in IHT could save your beneficiaries a substantial sum, especially if you have a large estate.

From an IHT perspective, there is no limit on the portion of your estate you can leave to good causes. For more information, see The Money Advice Service

Read James Antoniou from Co-op Legal Services on how to leave money to charity in your will

Your debts

After your death, your estate will need to cover the value of your debts before awarding any money or assets to your family or friends.

If you jointly owned your home with a partner, your creditors may force your other half to sell the property to cover the money you owe.

Joints tenants in a rented property will also need to cover any rent arrears acquired during their tenancy if their partner passes away.

If you have taken out a joint credit arrangement such as a personal loan or mortgage with a spouse or partner, they’ll still be liable for the outstanding debt after your death.

For more information on dealing with debt, visit StepChange

Life insurance

If you'd like to make sure your beneficiaries aren't saddled with a tax bill they can't afford, you could consider taking out a life insurance policy to cover the cost.

Rather than being forced to pay IHT from the value of your estate or get themselves into debt, your beneficiaries could use any payout to settle their IHT bill.

Be aware, there may also be other claims against any life insurance policy – for example, your creditors may have a right to any settlement paid out.

Where to get help

Passing on wealth is a complex area of law and finance, which means it may be sensible to seek advice from a solicitor or accountant who specialises in this area before making any decisions.

There are, however, a number of online resources that can provide information.

Gov.uk
Citizens Advice
Money Advice Service
StepChange