FT Adviser welcomes letters from readers. This week, Neil Liversidge, principal of West Riding Personal Financial Solutions, gives a real-life example of how inheritance tax can affect those in informal relationships.
He writes:
"You might have seen the awful news that five motorcyclists died in the Derbyshire Peak District near Buxton last Sunday, three in one accident and two in another. It’s a popular part of the country for motorcycle enthusiasts, with the Cat and Fiddle run well known throughout the UK and even beyond our shores.
"I’ve enjoyed many happy hours swinging my Harley through its bends. But sadly, it’s also an area that has seen more than its share of tragedy.
"One of those killed last Sunday in the three-bike accident was an old school friend and client.
"He was in a long-term relationship and approaching retirement, but he and his partner had never bothered to marry.
"Ever since they became my clients, and I learned the extent of their assets, I’d urged them to wed as a protection against an unnecessary inheritance tax liability. I’d even suggested they fly to Vegas, get a quick marriage conducted by an Elvis impersonator, and make a holiday of it.
"They agreed it made sense, but they just never got around to it. As result, my friend’s surviving partner will shortly face an inheritance tax liability.
"Property held by two individuals as joint tenants is not exempt from inheritance tax in the same way as it is for married couples or those in a civil partnership. When one owner dies, their share in the property passes automatically to the surviving joint tenant with the deceased’s share being part of their estate for inheritance tax purposes.
"This means there will be an inheritance tax liability if their total estate, including their share of the joint property, exceeds £325,000. The Residential Nil Rate Band is of no benefit, as if the deceased leaves the family home to their surviving informal partner, they cannot claim it, nor carry it forward for their own estate to eventually use. Double taxation is a real risk.
"The value of my clients’ house is such that the deceased’s share will trigger an inheritance tax charge, never mind his other assets, so his estate will pay 40 per cent tax on its entire value over and above the £325,000 nil-rate band.
"The one bright spot is that his non-property estate is sufficient to meet the likely charge, so his partner won’t have to sell what was their joint home, but it might so easily not have been the case. Those living in informal relationships run a real risk of a forced sale on first death if they are property rich but cash poor.
"There’s an old saying that 'If it works, don’t fix it', but there’s an exception to every rule, and if ever there was an exception to that rule, this is it."
