Unmarried couples, divorcees and single farmers face added inheritance tax challenges
Unmarried couples, divorcees and single farmers could face inheritance tax bills potentially hundreds of thousands of pounds greater than their married counterparts following the implementation of controversial IHT tax changes this month (April).
While the two significant changes announced at the end of last year, raising the 100% APR / BPR allowance from £1m to £2.5m per person and allowing the transfer of any unused allowance to a surviving spouse or civil partner have helped soften the blow for many, not all farming families will benefit to the same extent, according to calculations from NFU Mutual, the financial advice firm.
Unmarried couples
Married couples and civil partners have significant advantages when it comes to IHT planning. Anything left to the survivor on first death is normally exempt from IHT. The survivor can also benefit from any unused part of their late spouse’s £2.5m 100% APR/ BPR allowance and £325,000 tax free allowance.
Unmarried couples do not benefit from the spousal exemption, meaning that leaving assets to a surviving partner could trigger an IHT bill. While the deceased’s £2.5m APR/BPR allowance and £325,000 tax free allowance could reduce the amount payable, only the survivor’s allowances would be available on the second death when passing assets to the younger generation.
Divorcees
While widow(er)s can benefit from their late spouse’s unused £2.5m 100% APR/BPR allowance regardless of whether they owned agricultural or business assets, the same is not true of divorcees, who have not re-married and only benefit from their own allowances.
Sean McCann, chartered financial planner at NFU Mutual, said: “While married couples can potentially leave up to £6.3m of qualifying agricultural and business assets free of inheritance tax, the same is not true for single farmers or divorcees who haven’t subsequently remarried who are limited to a maximum of £3.15m.
“Couples who are not married face additional complexities, as they don’t benefit from the tax-free exemption available to spouses, leaving assets to a common law partner could trigger an inheritance tax liability, followed by a second charge on their subsequent death.
“Unmarried couples who want to maximise the amount passed on to younger generations could consider using the £2.5m 100% APR / BPR allowance and £325,000 tax free allowance to leave assets to the younger generation on first death, leaving the survivor free to do the same.
“For those unmarried couples who don’t wish to get married, it’s important to take advice on the advantages and disadvantages of this approach before taking any action.”
Sean added: “Before the inheritance tax proposals were announced, the approach of many farmers was to gradually hand over more of the day-to-day management to the younger generation while holding onto the ownership of the assets until a later date.
“The new rules will prompt many to pass on the assets at an earlier stage, because if they live seven years, they would normally be free of inheritance tax.
“For that to work it’s important that the farmer doesn’t continue to benefit from the assets they give away. If they intend to continue in the business, they’ll need to pay a market rent to the new owner or if in partnership with them, reduce their profit share to reflect the new ownership.”