After more than forty years with his partner Jane Fallon, Ricky Gervais has said that inheritance tax may finally give him a reason to marry.
Speaking to Saga Magazine, Gervais questioned what marriage would add to a relationship in which they already share their lives and finances. “How more married can you be?” he asked. From a personal perspective, perhaps not very much. For inheritance tax purposes, however, the legal distinction remains considerable.
No length of cohabitation currently gives an unmarried couple the inheritance tax treatment available to spouses and civil partners. A relationship of four decades is treated no differently in that respect from a much shorter one.
When commitment and legal status part company
Inheritance tax is generally charged at 40% on the part of an estate above the available tax-free thresholds, after taking account of any exemptions and reliefs that apply. The standard nil-rate band is currently £325,000, which means that inheritance tax will not normally be payable on the first £325,000 of an estate. A further residence nil-rate band of up to £175,000 may be available where a qualifying home is left to children or other direct descendants.
For married couples and civil partners, there is an additional protection. Where the spouse or civil partner exemption applies in full, assets can pass from one to the other without an inheritance tax charge. Any unused proportion of the deceased’s nil-rate band and, where applicable, residence nil-rate band may also be available when the surviving spouse or civil partner later dies.
An unmarried partner does not benefit from the same exemption. The usual tax-free allowances and any other available reliefs still have to be taken into account, so being unmarried does not mean that everything inherited by a partner will necessarily be taxed at 40%. What it does mean is that assets passing between them do not become exempt from inheritance tax simply because they have shared their home, finances or lives for many years.
A couple may consider their finances entirely shared during their lifetimes, but find that the legal nature of their relationship becomes financially significant on death. For Gervais and Fallon, their many years together does not produce the inheritance tax treatment that marriage or civil partnership would.
Reform, but only up to a point
The timing of Gervais’s comments is particularly pertinent because the Government has recently consulted on proposals to strengthen the legal rights of cohabiting couples.
A fairer end to relationships considers both what happens when cohabitants separate and what happens when one of them dies. At present, if someone dies without a valid Will, the intestacy rules determine who is entitled to inherit their estate. An unmarried partner has no automatic entitlement under those rules, regardless of whether the couple has lived together for five years, twenty years or, as in Gervais and Fallon’s case, more than forty.
The Government is considering whether that should change. The consultation proposes giving some cohabitants an automatic right to inherit where their partner dies without a Will, although it has not yet been decided how long a couple would need to have lived together before that right arose. Earlier Law Commission proposals suggested five years where a couple had no child together and two years where they did, and the Government is now seeking views on what the appropriate periods should be.
If the proposal becomes law, some surviving cohabitants who currently receive nothing automatically under the intestacy rules would acquire a right to inherit. It would remove the need for a Will to establish that entitlement in those cases.
It would not, however, give them the inheritance tax treatment available to a spouse or civil partner. Inheritance tax is specifically excluded from the consultation, so a surviving cohabitant could gain an automatic right to inherit while remaining subject to different tax rules on what they receive.
Until the law changes
The proposals, at present, remain just that. Under the law as it stands, an unmarried partner still has no automatic right to inherit under the intestacy rules. For couples who want to ensure that the survivor inherits, making a Will therefore remains particularly important.
A Will allows someone to decide what should pass to their partner rather than leaving the distribution of the estate to the intestacy rules. Where no Will has been made, or where a Will does not make adequate provision for the surviving partner, the position is not necessarily without remedy. Certain cohabiting partners can make a claim under the Inheritance (Provision for Family and Dependants) Act 1975, which allows the court to award reasonable financial provision from an estate.
That is not the same as having an automatic right to inherit. A claim has to be brought, and whether any provision is made will depend on the circumstances the court is required to consider. Making a Will can avoid leaving a surviving partner to rely on that process in order to seek provision from the estate.
There is then a separate inheritance tax issue. A Will can determine that assets should pass to an unmarried partner, but it cannot give that partner the exemption available to a spouse or civil partner. Even where someone has deliberately chosen to leave their estate to a partner with whom they have spent decades, the tax treatment does not change simply because their intentions are clear.
For unmarried couples, estate planning therefore involves both ensuring that assets pass as intended and considering the tax consequences when they do. Depending on the circumstances, available allowances and reliefs, lifetime gifting or appropriate life insurance arrangements may form part of that planning. None creates the spouse exemption that marriage or civil partnership can provide.
A legal distinction that still matters
Gervais and Fallon may have financial circumstances very different from those of most cohabiting couples, but the principle illustrated by his comments is not confined to particularly large estates.
Two people can build a home, combine their finances and spend most of their adult lives together without acquiring the inheritance tax treatment that follows from marriage or civil partnership. The distinction is easy to overlook precisely because, in every other practical sense, the couple may already regard themselves as a family.
The proposed cohabitation reforms may narrow some of the legal differences between marriage and cohabitation, particularly in relation to separation and inheritance where somebody dies without a Will. They do not currently propose changing the inheritance tax distinction.
After more than forty years together, Gervais’s question was how much more married he and Fallon could be. In personal terms, the answer may be very little. For inheritance tax purposes, legal status continues to make a material difference.
