Most married couples and civil partners are free to transfer assets to each other without having to worry about a future inheritance tax bill. However, for those who choose to cohabit without entering into a marriage or civil partnership, this same right is not extended. Without the choice of civil partnership or some other such legally binding arrangement, there is one group of cohabiting couples in particular who lose out the most: siblings.
It’s been almost a decade since the ‘nil rate band’ of inheritance tax was last changed (that’s the minimum value your estate must be worth before inheritance tax becomes payable on death), having remained at £325,000 since 2009. Yet, according to HMRC statistics, the number of people with estates worth more than £1m has almost doubled in the last ten years alone. Although it appears more people are paying more inheritance tax, it is especially problematic if you are cohabiting siblings with an estate valued over the nil rate band.
What are inheritance tax rules?
Inheritance tax is charged at 40% on all assets worth more than the nil rate band. Married couples and civil partners have a combined nil rate threshold of £650,000, in addition to a further allowance known as the ‘residential nil rate band’ of up to £250,000, which is provisional on the main residence being passed down to direct descendants such as children or grandchildren. However, the residential nil rate band does come with a number of conditions attached and so may not be available to everyone – If you are unsure and your estate is valued above the standard nil rate band, it’s recommended that you seek professional advice.
When the first partner dies, the percentage of their unused tax-free allowance will pass to the surviving spouse, increasing the amount the surviving spouse can pass on tax-free in turn. This means that when the second partner dies, inheritance tax may not potentially be charged on the first £900,000 of their estate (where the residential nil rate band applies), provided none of the allowance was used when the first partner died.
Contrast this with the position of sibling couples who face a sizeable tax burden on all assets worth over £325,000 following the death of the first sibling. No equivalent exemption exists for gifts between siblings, and siblings cannot of course marry or become civil partners in order to gain the advantage of this exemption. Inevitably, this means that sadly, often the surviving sibling has little choice but to sell their home and move out in order to pay the inheritance tax bill on the deceased sibling’s share of the property.
For example, the tax liability on a £500,000 estate would be zero for a married couple whereas a surviving sibling would be liable to pay up to £70,000 of inheritance tax on the same value of assets. The lack of rights for platonic partners means that many live-in family members who act as carers do not receive tax breaks or financial support and instead may face eviction from their home when the cared-for person dies.
Attempts to change the law
The question of whether siblings should be permitted to enter into civil partnerships to enable them to take advantage of the same tax advantages was the subject of litigation ten years ago when two Wiltshire sisters took the issue to the European Court of Human Rights, without success. They claimed that they were discriminated against on the basis that they were in a platonic and not a sexual relationship. The sisters had lived together all their lives in an increasingly common domestic arrangement, which has become a popular option for home ownership. Despite the long duration of their relationship of cohabitation, the Court said that without a legally-binding agreement in place it was fundamentally different to a marriage or civil partnership couple and so their claim failed.
More recently, Conservative peer, Lord Lexden, launched the latest attempt to start the process of ending what is described as the ‘glaring injustice’ in the way sibling couples are treated in respect of inheritance tax. The Civil Partnership Act 2004 (Amendment) (Sibling Couples) Bill received its second reading in the House of Lords last month. If passed, the Bill will mean that two siblings (defined as brother, sister, half-brother or half-sister) would be able to enter into a civil partnership, provided they are both over the age of thirty and have lived together for a continuous period of twelve years. This would grant sibling couples similar rights as civil partners when the relationship ends, particularly upon the death of one of them.
Despite the considerable financial hardship which often results upon the death of one sibling in such an arrangement, many are opposed to the Bill while others believe that a civil partnership is nonetheless not the correct vehicle for facilitating inheritance tax change for siblings.
So what can cohabiting siblings do?
Given that the position with regard to civil partnerships remains to be confirmed for some time yet, inheritance tax planning for siblings, both to reduce the overall inheritance tax liability, and to plan for payment of tax on the first death, is as essential as it is for unmarried couples. A review of their Wills could therefore be an important first step as while options do exist, forethought is critical.
At Morecrofts, our specialist Private Client team have a wealth of experience in advising on and dealing with Tax Issues.
Your expert lawyer will deal with you sensitively and professionally ensuring that all of the tax issues are dealt with efficiently giving you the peace of mind in knowing that everything is being taken care of.