15th July 2024

How can non-married, non-civil partners be impacted by the Residential Nil Rate Band Allowance?

It may seem perhaps counter-intuitive to be writing an article about the Residential Nil Rate Band Allowance when there is a possibility that the new Labour Government may shortly schedule it’s demise; but until that point in time is reached and that repealing measure is on the statute books, then we have the Residential Nil Rate Band Allowance. 

We are increasingly seeing couples who, for a variety of reasons, choose not to be married or in a civil partnership. Often, the taxation of being married or equally not being married are simply not appreciated, and one does have to have sympathy, but it can be vital.

Take the issue of taxation on death. It may well be the case that the couple may jointly own their home. Let’s say it is worth £800,000 and passes upon death to the survivor by survivorship, i.e. outside of operation of any Will. As the survivor is not married to the deceased, that £400,000 value transfer by reason of death uses all of the non-survivor’s Nil Rate Band Allowance (£325,000), and the remaining £75,000 of value is liable to Inheritance Tax at 40%. Had they been married or in a civil partnership, then this would have been avoided.

But what if the deceased had had children?

The surviving life partner could, by Deed of Variation within 2 years of the death, sever the joint tenancy. The survivor could by that Deed of Variation, redirect some of the deceased’s equity to the deceased’s children to use some of the Residential Nil Rate Band Allowance which otherwise cannot be used. If the deceased and surviving life partner had been married, it would have been capable to transfer this over, but as they were not, this is the only way the Residential Nil Rate Band Allowance can ever be used. By doing this, the tax bill in this example can be cut to zero. Of course all of the owning parties would need to be comfortable with the arrangement, especially the life partner who would have some of the equity in their home being owned by the non-surviving life partner’s children. In some instances, this will not be appropriate for the surviving life partner if they consider the relationship with the children as poor or becoming poor in the future.

But this does show that the complex and perhaps arbitrary Residential Nil Rate Band Allowance can be used even where at first review all taxation advantage seems lost.

This also shows that non-married, non-civil partners should always make Wills and given house prices locally to us in the southeast, should always consider Inheritance Tax.

 

For advice and drafting assistance in the above area, please contact Edward Walter on 01892 502 320 or email him at ewalter@bussmurton.co.uk

Edward Walter

Edward Walter
Partner