Marriage & Civil Partnerships
Marriage and civil partnerships have significant implications for inheritance planning in the UK. Understanding how these legal relationships affect your estate can help you make informed decisions about asset protection and wealth transfer.
Spousal Exemptions
One of the most valuable inheritance tax benefits is the complete exemption for transfers between spouses or civil partners.
Unlimited Lifetime Transfers
- Assets can be transferred between spouses or civil partners during their lifetime with no inheritance tax implications
- No limit applies to the value of assets that can be transferred
- Allows for flexibility in balancing estates and using tax allowances efficiently
- Transfers also do not trigger capital gains tax (CGT)
Inheritance on Death
- Assets passing to a spouse or civil partner on death are completely exempt from inheritance tax
- This applies regardless of the value of the estate
- The exemption applies automatically and does not need to be claimed
- Applies to all worldwide assets for UK-domiciled couples
Transferable Nil-Rate Band
- When someone dies leaving their estate to their spouse/civil partner, their unused nil-rate band can be transferred
- This effectively doubles the nil-rate band available on the second death (currently up to £650,000)
- The same principle applies to the residence nil-rate band, potentially adding another £350,000
- Combined, this means a married couple could pass on up to £1 million tax-free
Non-UK Domiciled Spouses
- If one spouse/civil partner is non-UK domiciled, the spousal exemption is limited to £325,000
- The non-UK domiciled spouse can elect to be treated as UK domiciled for inheritance tax purposes
- This election provides unlimited spousal exemption but makes worldwide assets subject to UK inheritance tax
- Careful planning is essential in international marriages
Joint Assets
How assets are owned jointly between spouses or civil partners affects their treatment on death.
Joint Tenancy
- Property owned as joint tenants passes automatically to the surviving owner regardless of the will
- The entire property forms part of the survivor’s estate for inheritance tax purposes
- Provides security for the surviving spouse but less flexibility for estate planning
- Common for the main residence and joint bank accounts
- Not subject to probate as ownership passes by “survivorship”
Tenants in Common
- Each owner has a distinct share (not necessarily equal) that can be passed on according to their will
- Provides more flexibility for estate planning and protecting shares for children
- Can help with care fee planning and utilizing inheritance tax allowances
- Requires a valid will to be effective
- Registration of property as tenants in common should be recorded at the Land Registry
Bank Accounts and Investments
- Joint accounts typically pass to the surviving account holder by survivorship
- Investment accounts may be held as joint tenants or tenants in common
- Insurance policies can be written in joint names with different payout options
- ISAs and pensions have specific rules for spouses/civil partners
Prenuptial Considerations
Planning before marriage or civil partnership can protect assets and establish clear inheritance expectations.
Prenuptial Agreements
- Not automatically legally binding in the UK but given significant weight by courts if properly prepared
- Can protect pre-marital assets and inheritance from divorce settlements
- Should address inheritance intentions for children from previous relationships
- Best prepared well in advance of the marriage/civil partnership
- Should be reviewed regularly, especially after significant life events
Postnuptial Agreements
- Similar to prenuptial agreements but made during the marriage/civil partnership
- Can be particularly useful after receiving an inheritance or when circumstances change
- May carry more weight with courts as both parties are already legally committed
- Should be prepared with independent legal advice for both parties
Family Business Protection
- Shares in family businesses can be protected with appropriate agreements
- Shareholder agreements can restrict transfer of shares on divorce
- Consider trusts to ring-fence business assets
- Cross-option agreements can ensure business continuity while protecting spouse’s interests
Second Marriages
- Extra care needed to balance interests of new spouse and children from previous relationships
- Consider life interest trusts to provide for spouse while protecting capital for children
- Mutual wills (binding agreements about future will provisions) may be appropriate
- Clear communication with all family members about intentions is important
Inheritance Planning
Strategic planning can maximize the benefits of spousal exemptions while ensuring assets ultimately pass according to your wishes.
Balancing Estates
- Consider transferring assets between spouses to ensure both nil-rate bands are utilized
- For larger estates, maintain roughly equal wealth to maximize tax-free allowances
- Regular reviews of asset ownership are essential as values and tax rules change
- Balance must be struck between tax efficiency and personal financial security
Will Planning
- Wills are essential - intestacy rules may not reflect your wishes
- Consider flexible will provisions using trusts to allow post-death planning
- Mirror wills are common for couples but may not always be appropriate
- Review wills regularly, especially after marriage (which revokes previous wills)
Life Interest Trusts
- Provide income for a surviving spouse while protecting capital for ultimate beneficiaries
- Can be particularly useful in second marriages
- May protect assets from care home fees
- Can be created during lifetime or on death through a will
Deed of Variation
- Allows beneficiaries to redirect inheritance within two years of death
- Can be used to make gifts to spouse to utilize spousal exemption retrospectively
- All affected beneficiaries must agree to the variation
- Cannot be used to reduce tax if that is the only purpose
Gifts and Allowances
- Consider making lifetime gifts as a couple to maximize annual exemptions
- Each spouse/civil partner has their own £3,000 annual exemption (£6,000 combined)
- Normal expenditure out of income exemption can be used by both partners
- Gifts between spouses/civil partners can position assets with the partner in lower tax brackets
Pension Planning
- Pensions can often be passed to spouses free of inheritance tax
- Defined contribution pensions can potentially be passed down through generations
- Expression of wish forms should be kept updated
- Careful consideration needed for balancing pension benefits against other assets
Life Insurance
- Policies can be written in trust to provide inheritance tax-free lump sums
- Joint life second death policies can cover expected inheritance tax liabilities
- Premiums paid by one spouse for a policy in trust for the other may qualify as exempt transfers
- Regular reviews ensure coverage remains appropriate as circumstances change
FAQ
What is the spousal exemption for inheritance tax in the UK?
The spousal exemption allows you to transfer any amount of assets to your spouse or civil partner during your lifetime or on death without incurring inheritance tax. This applies to UK-domiciled couples and provides significant flexibility for estate planning.
Does marriage automatically mean my spouse inherits everything?
No. While assets held as joint tenants automatically pass to the surviving spouse, assets held solely in your name or as tenants in common are governed by your will or the rules of intestacy if you don’t have a will. Therefore, a will is crucial to ensure your assets are distributed as you wish.
What is the transferable nil-rate band?
The transferable nil-rate band allows the unused portion of the first spouse’s nil-rate band (currently £325,000) to be transferred to the surviving spouse, effectively doubling the nil-rate band available on the second death (up to £650,000). The same principle applies to the residence nil-rate band.
What is the difference between joint tenancy and tenants in common?
Joint tenancy means you both own the entire property, and on death, the surviving owner automatically inherits it. Tenants in common means you each own a distinct share, which you can pass on according to your will.
Are prenuptial agreements legally binding in the UK?
Prenuptial agreements are not automatically legally binding in the UK, but courts give them significant weight if they are properly prepared. This includes both parties obtaining independent legal advice, full disclosure of assets, and the agreement being signed well in advance of the marriage.
How does non-UK domicile affect the spousal exemption?
If one spouse/civil partner is non-UK domiciled, the spousal exemption is limited to £325,000. However, the non-UK domiciled spouse can elect to be treated as UK domiciled for inheritance tax purposes, providing unlimited spousal exemption but making their worldwide assets subject to UK inheritance tax.
What is a life interest trust, and how can it be useful?
A life interest trust provides income for a surviving spouse (or another beneficiary) during their lifetime while protecting the capital for ultimate beneficiaries, such as children. It’s particularly useful in second marriages or when you want to protect assets from care home fees.
Can I gift assets to my spouse tax-free during my lifetime?
Yes, you can transfer assets to your spouse or civil partner during your lifetime without incurring inheritance tax. There is no limit to the value of assets you can transfer.
What happens to joint bank accounts when one spouse dies?
Joint bank accounts typically pass automatically to the surviving account holder by survivorship, regardless of the will.
How can I protect my family business in case of divorce or death?
You can protect your family business through shareholder agreements, trusts, and cross-option agreements. These mechanisms can restrict the transfer of shares on divorce and ensure business continuity while protecting your spouse’s interests.