In response to a government review of inheritance tax, Royal London has called for cohabiting couples to receive the same tax treatment as those who are married or in civil partnerships. As it currently stands married couples and those in civil partnerships can:
- Pass their estate to one another tax free on death
- Transfer any unused part of their IHT nil rate band1 (currently worth £325,000) to one another on death
- Transfer any unused portion of the recently introduced residential nil rate band (RNRB)2 to one another on death.
However, cohabiting couples are not able to benefit from these measures.
Responding to a call for evidence from the Office of Tax Simplification for a review into inheritance tax the insurer said that the number of cohabiting couples had grown with an estimated 3.2m cohabiting couples in the UK in 2016. This is up from approximately 1.5m in 1996.3
While cohabitation has previously been seen as a precursor to marriage or civil partnership, it is increasingly being seen as an alternative.
There would need to be safeguards in place to prevent fraud. Couples would need to present evidence that they had lived together for a certain amount of time - for instance three years – before qualifying for the benefit.
Helen Morrissey, personal finance specialist at Royal London said:
"Cohabiting couples can remain together long term, raise children together and share assets. Many cohabiting couples believe that after a certain amount of time cohabitees achieve some kind of “common law marriage” status whereby they attain a similar level of rights to those who are married or in civil partnerships. However, this is not the case and a surviving partner can find themselves with a sizeable IHT bill when their partner dies. The time has come to bring these rules into the 21st century and recognise that not everyone wishes to marry."
The Office of Tax Simplification expects to publish its report in Autumn 2018.
In its response Royal London also called for the level of gifting allowances to be raised as well as a review of tax charges when a life insurance policy has been paid into trust.
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Helen Morrissey, Corporate PR Specialist – Long Term Savings
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Notes to editor
- The nil rate band is the value of an estate which is not subject to inheritance tax. This band is currently set at £325,000. Anything over this amount will attract a 40% tax charge.
- The residential nil rate band was introduced in April 2017. It is in addition to an individual’s nil rate band and comes into play when the main residence is passed down to a direct descendant such as a child or grandchild.
About Royal London:
Royal London is the largest mutual life, pensions and investment company in the UK, with funds under management of £117 billion, 8.8 million policies in force and 3,745 employees. Figures quoted are as at 30 June 2018.