Inheritance tax is a tax on the assets of someone who has died but the rules are different for married couples and those in a civil partnership than for those who live together. Where assets exceed a value of £325,000, inheritance tax is paid at 40% on anything above that threshold. The £325,000 is called the nil rate band and everyone has this allowance.
While the nil rate band is transferable between spouses (meaning the surviving spouse has a total potential nil rate band allowance available to them of £650,000), it cannot be transferred between partners who live together. Cohabiting couples can therefore end up paying much more tax than a married couple if they do not have a will in place and have given thought to some sensible tax planning.
The government also introduced a new inheritance allowance known as the ‘residence nil rate band’ that came into force on 6 April 2017. This allowance applies in addition to the nil rate band allowance but is conditional upon the main family home (or a share of it) being passed on to children and grandchildren.
The residence nil rate band is also transferable between spouses so if it isn’t used on the death of the first spouse, the survivor will have two allowances on their death. However, this does not apply to cohabiting couples.