Inheritance Tax planning for single individuals or couples without children
Estate planning is not just for ‘traditional’ families
There is a common misconception that inheritance tax only impacts families in ‘traditional’ structures; however single individuals, unmarried couples and couples who do not have any children are also at risk of being affected by Inheritance Tax.
In today’s society, more couples are choosing to cohabit rather than get married and many couples are childless. These people are often wealthier with more disposable income than parents partly due to them not having all the additional expenses that comes with raising children.
There is a common misconception that if you are childfree, then you do not need to worry about inheritance tax planning. However, the reality is that single and unmarried couples without children often have higher inheritance tax bills as they get less reliefs; you should plan leaving a legacy.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
What is inheritance tax?
Inheritance tax is the tax applied to your estate when you die.
The government gives every individual a Nil Rate Band of £325,000 – anything in your estate over this amount is usually taxed at 40%. You also need to include any non-exempt gifts within this figure you have made over the previous 7 years. The Nil Rate Band can be passed to a spouse/civil partner when you pass away. However, if you are not married then you cannot pass this on.
What is in my estate for Inheritance Tax?
Your estate is everything your personally own, your worldwide assets: your home, cars, jewellery, investments and cash. Pensions and trusts are generally outside of your estate for inheritance tax purposes although personal pensions are due to be brought back inside the estate from April 2027.
Single people and unmarried couples actually face a higher inheritance tax liability than a ‘traditional’ family households because there are fewer exemptions available to them. This means that they need to be even smarter when it comes to planning their finances. If you are married, you can pass on all of your wealth to your spouse/civil partner free from tax regardless of value subject to the "long term Residency rules.
In contrast, if you are single, unmarried or divorced, then your tax-free allowance is limited to £325,000. This means that even if you’re in a long-term relationship, your other half will end up facing a 40% tax bill on anything they inherit from you above the value of £325,000.
Losing Residence Nil Rate Band
People without children or direct descendants (a direct descendant is a child, a grandchild, stepchild, a fostered child or an adopted child. It is NOT a Godchild or a niece or nephew) lose the Residence Nil Rate Band (RNRB) which is an allowance of up to £175,000 per person if you leave your home to a direct descendant (providing the estate is worth less than £2 million). This means that the IHT liability of someone who is married with children is significantly lower than someone who is married but childfree, or single and childfree.
Inheritance tax exemptions that single and unmarried couples can make use of:
There are still many ways that you can reduce your inheritance tax liability by planning ahead. Inheritance tax mitigation is a complex area of financial planning and professional advice should be sought – we can help – book a no-obligation meeting today.
Gifting allowance: Every individual gets a £3,000 gifting allowance which they can use each year – this is outside of your estate immediately. You can carry forward last year’s allowance if you did not use it.
Gifts out of normal expenditure exemption: If you have excess income every month, for example from pensions, rental income or natural income from investments, then you can set up an excess income plan. Money in an excess income plan is held in trust and is outside of your estate immediately for inheritance tax. The exemption is claimed on your death so it is important to keep accurate records for HMRC.
Trusts: Discretionary trusts are flexible arrangements where you can gift assets to a trust and control who benefits from it and when. Provided the settlor has survived for 7 years then trusts are outside of your estate for inheritance tax purposes. The rules around trusts are complex and it is important to seek advice. Book a meeting now to find out if a trust is suitable for you.
Why you need a Will even if you do not have children
Those who are single or childless need to put extra consideration into who they want to inherit their estate. If you die intestate (without a Will) then the court dictates who receives your estate.
Having a Will makes sure that the people you want to inherit your estate do so and it provides peace of mind for you and your loved ones. It also avoids conflict between would-be beneficiaries, including siblings.
You may choose to leave a gift to charity as part of your legacy. If you donate more than 10% of your net estate to charity then your IHT liability will be reduced to 36% rather than 40%.
The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time. the value of any tax relief depends on individual circumstances.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place and along with Trusts are not regulated by the Financial Conduct Authority.
Book a no-obligation meeting now
Understanding your potential inheritance tax liability and steps you could take to reduce this is an essential part of estate planning, especially if you are unmarried, single or childless.
At Borealis Financial Planning, we can explore the options available to you and explain the tax implications of these to help you to leave a lasting legacy.
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