Inheritance Tax (IHT) often hits hardest where it’s least expected, particularly among siblings, nieces, nephews, and friends who inherit property.
Unlike parents and married couples, who benefit from specific tax reliefs, these groups find themselves facing substantial tax liabilities.
(Read Time: Approx. 6 minutes)
Topics Discussed:
- The disparity in inheritance tax reliefs between married couples, parents, and other relatives or friends.
- Potential changes to inheritance tax laws that could benefit cohabiting siblings and unmarried couples.
The Sibling Trap
Under current inheritance tax rules, the first £325,000 of an estate can be passed on without incurring IHT.
Parents can also benefit from an additional £175,000 residence nil-rate band if they leave their home to direct descendants like children or grandchildren.
However, these benefits do not extend to siblings, nieces, nephews, or friends.
Take the case of Hilary Furlonger and her sister Clare, for example. They’ve lived together in a £1.5 million Georgian townhouse in Bath for over two decades.
Yet, despite their close bond and shared life, they face an IHT bill of £220,000 if one passes away and leaves the property to the other.
For instance, if Hilary or Clare were to leave their entire estate to the other, the surviving sister would face a 40% tax on any value above £325,000, amounting to a £220,000 tax bill.
This could force the sale of their home, adding financial strain to an already difficult situation.
Nationwide Effects
The problem is not isolated to the Furlonger sisters.
Many others find themselves in similar predicaments due to the strict IHT rules that apply to non-direct descendants.
This issue becomes particularly pressing as house prices continue to rise, pushing more estates above the IHT threshold.
Unmarried Couples and Friends: A Growing Concern
In the UK, approximately 3.6 million couples live together without being married or in a civil partnership.
These couples are also excluded from the spousal tax relief, which allows married couples to transfer their estates tax-free.
For example, Funmi Olufunwa and her partner, who have lived together in South London for seven years and share property worth more than the nil-rate band, would be liable for a significant tax bill if one of them died.
This is despite their commitment to each other and their family, including their five-year-old daughter.
The couple has taken steps to mitigate potential tax burdens, such as purchasing life insurance and planning to use their pensions and ISAs to cover any taxes.
However, these measures do not eliminate the risk entirely.
This situation can be exacerbated if the couple’s main asset is their home, as selling it quickly to cover the tax may not always be feasible or desirable.
Proposals for Change
The issue of extending inheritance tax reliefs to siblings and other non-traditional family units has been discussed at length.
In 2008, Joyce and Sybil Burden, two sisters who lived together all their lives, took their case to the European Court of Human Rights, arguing for the same tax treatment as married couples.
Despite their efforts, the court ruled against them, a decision that highlighted the limitations of the current system.
A More Inclusive Approach to Inheritance Tax
More recently, in 2022, an amendment to the Inheritance Act 1984 was proposed in the House of Lords to allow property transfers between siblings to be IHT-free under certain conditions.
This amendment, championed by Lord Lexden, aimed to address the financial hardships faced by siblings like the Furlongers when one sibling inherits the other’s share of a jointly-owned property.
Unfortunately, the proposal did not progress past its first reading, leaving many in similar situations without the relief they need.
How to Mitigate Inheritance Tax Burdens
For those who find themselves ineligible for the current tax reliefs, there are still strategies to consider.
One approach is to structure property ownership in a way that minimises tax exposure.
For instance, properties owned as joint tenants automatically pass to the surviving owner upon death, with the value of the deceased’s share included in the estate for IHT purposes.
Alternatively, owning property as tenants in common allows each person to control their share independently, which can be advantageous for tax planning.
The Use of Trusts
Another potential solution is to use trusts, which can help manage and protect assets for future generations.
Trusts can provide a way to pass on property without triggering immediate IHT liabilities, though they come with their own set of rules and potential costs.
For example, placing a property in a trust can remove it from the taxable estate, but this may involve immediate tax charges and ongoing management fees.
Life Insurance’s Role
It’s also possible to use life insurance policies to cover potential tax liabilities, ensuring that heirs are not forced to sell property to pay taxes.
However, this requires careful planning and consideration of the long-term financial implications.
Summary
The inheritance tax system in the UK is complex and often seems outdated in its treatment of modern family arrangements.
As more people choose to live together without marrying or have close relationships with siblings and friends, the call for a more inclusive approach to inheritance tax becomes louder.
If you find yourself or your loved ones potentially affected by these inheritance tax issues, it’s essential to take proactive steps.
At Help Me Legal, we specialise in estate planning and can help you explore your options to mitigate tax liabilities.
Don’t leave your estate planning to chance—contact us today to ensure that your assets are protected, and your loved ones are provided for in the most tax-efficient way possible.
Call us at 01772 282768, fill in our contact form here, or reach out via our 24 hour WhatsApp at +447816848188.