To understand how this example relates to your wishes and circumstances, please see MARRIED COUPLES first, and then match the differences between that, and the discussion below.
Albeit there has been a lot of changes in law recently to equalise the rights and options of SAME-SEX couples with those of MARRIED couples; at the present time, a cohabiting couple family does NOT HAVE similar rights and equalities. Cohabiting couples are NOT A COMMON LAW MARRIAGE as many believe. There is no-such-thing in UK law.
Cohabiting couples’ estates are treated as if they were TWO SINGLE and unrelated persons.
Therefore by not being married, the couple and children lose out on two vital benefits:
( 1 ) TRANSFERRABLE NIL RATE BAND – INHERITANCE TAX ALLOWANCE. This is worth £325,000 to the survivor after the death of a spouse.
( 2 ) TRANSFERRABLE RESIDENTIAL NIL RATE BAND – INHERITANCE TAX ALLOWANCE. This is worth £100,000 to the survivor after the death of a spouse in the tax year 2017-18. By the year 2020-21 it will be worth £175,000 which makes a grand total allowance per married couple with children worth £1,000,000 free of inheritance tax.
Because the cohabiting couple do not benefit from the transferrable allowance, their children’s legacy will lose out by at least £200,000 due to tax in tax year 2020-21, where the Will passes all to survivor – plus; the costs of borrowing the money with which to pay it. Unless you just happen to have a chest of spare pound notes in the cellar waiting for that day.
The TAXABLE ESTATE of unmarried Jack and Sarah, is now worth: £1,156,000.
And, the TAX DUE on this amount is: £462,400 – in addition to the £122,000 tax on first death. = £684,400
NOTE: whereas Sarah, the surviving married spouse in example-1 would NOT HAVE, to pay any tax on the death of her husband Jack; Sarah, the surviving cohabiting partner, WOULD HAVE, to pay a tax of £122,000 on her partner Jack’s death – which may result in her having to sell the FAMILY HOME that they had bought together. (assuming Jack’s pension scheme allows nomination to cohabiting partners )
What Jack and Sarah had believed – assumed – about cohabiting being financially more cost effective, would actually result in much larger costs to the family and a significant loss in inheritance to the children that they wanted so much to benefit.
The good news is that Edmunds & Eve explore the questions and situations that other providers are not experienced in. We focus on preserving family wealth while making the experience stress free in Plain English.