The RNRB: are there options for unmarried couples?

Cohabiting couple
Since April 2017, there has been an extra Inheritance Tax allowance called the Residence Nil Rate Band (RNRB) in addition to the basic Inheritance Tax Allowance.  But unmarried couples get a raw deal when it comes to the RNRB.

The RNRB applies where the Deceased left a property in their Will which was at some point their primary residence, and this was left to a direct descendant. The RNRB is currently £150,000 and this  will increase to £175,000. For future years, the allowance is expected to increase in line with the Consumer Price Index.

The introduction of the RNRB means that married couples and civil partners can leave up to £1 million tax free, because unused allowances are transferable. If the first to die leaves everything to the survivor, they have not utilised any of their basic or RNRB allowance (because gifts in your Will to a spouse or civil partner are exempt from Inheritance Tax) and these unused allowances can be claimed by the survivor’s estate.

But what of cohabitees? Unfortunately they get a raw deal.

“Many cohabitees are under the false impression they are common law spouses, with the same guaranteed protections and financial and legal rights as married couples.”

~ Sheela Mackintosh-Stewart, ifamiliesUK in Forbes

Here are a number of possible scenarios and their outcomes:

1: A cohabitee leaves their share of the family home to their partner

For cohabitees, each person can leave up to £325,000 on their death without their estate being liable for Inheritance Tax. However, they will only get the additional RNRB if they leave their share of the family home to a direct descendant. If instead they leave it to their (unmarried) partner first, their partner is not a ‘direct descendant’ and the RNRB cannot be claimed. Any part of the estate over the £325,000 threshold will be taxed at 40%.

2: A cohabitee leaves their share of the family home to their children

If a cohabitee leaves their share of the family home to their own children, their estate will benefit from the RNRB – but it will rarely be desirable that the children become co-owners with the survivor (even if the survivor is also a parent). A child could run into financial difficulties, or go through a divorce – and their ownership of the inherited share could put the survivor at risk of losing their home.

3: Cohabitees make Mirror Wills leaving everything first to their partner, then to the children

If a couple make a Mirror Will with their partner which leaves everything to the partner and then the children, the estate is particularly at risk. Regardless of what promises the couple make to each other, the Will can be changed after the first death to disinherit the Deceased’s children. This often happens when the children are not the survivor’s, but it might also happen if the survivor falls out with one of their own children. Keep in mind that there is no legal right for an adult child to inherit from their parent – the parent has testamentary freedom to leave their estate to whomever they choose.

Alternatively, the Deceased’s children may be disinherited unintentionally if the survivor goes on to marry. Marriage cancels the survivor’s Mirror Will, and without a new one, their new spouse is then first in line to inherit. Even if the survivor makes a Will leaving everything to the children, it will be open to the new spouse to bring a claim if they are not provided for.

Another potential pitfall arises if the survivor runs into financial difficulty, or needs care. The Deceased’s share of the property may be used up before their children see a penny.

Further, it should be borne in mind that the survivor’s estate cannot claim any of the first-to-die’s unused allowances (if any – because gifts from the Deceased’s estate to the Survivor will have used up a portion of them). This is the case even if the couple live together for decades and have children together. Further, the RNRB is not available in respect of the gift of property from the survivor to any children who are not ‘direct descendants’ of the survivor. A direct descendant includes:

  • a child who is, or was at any time, their step-child
  • their adopted child
  • a child fostered at any time by them
  • a child where they’re appointed as a guardian or special guardian when the child is under 18
  • …and others – see ‘Who is considered a direct descendant‘.

A gift by the survivor to the Deceased’s children would not therefore qualify, unless the children have been adopted.

4: A cohabitee leaves their partner a ‘Life Interest’ (IPDI) in their share of the family home

If the first-to-die leaves their partner a life interest in their share of the property (an Immediate Post Death Interest) with the remainder to the children, the same applies: the RNRB won’t be available in relation to the first-to-die’s share. Only the survivor’s estate can claim the RNRB in relation to their own share, so far as it passes to their own children.

This is unfortunate as the life interest scenario is typically what most couples would like to do, particularly where there are children from a previous relationship. A life interest ensures the survivor is provided for whilst safeguarding the inheritance for the first-to-die’s own children.

5: A cohabitee leaves the children an immediately terminable life interest

Some have suggested that a cohabitee could give the children an Immediate Post Death Interest in their share of the property, which is then terminated immediately in favour of a life interest for the survivor (the latter being taxed as a Relevant Property Trust). Whilst this would in theory meet the requirements for the RNRB to be claimed, the various anti-avoidance provisions should be considered, including:

OK so none of those work – what can cohabitees actually do?

One solution would of course to be get married!

Aside from this, if one person is expected to live longer but cannot support themselves financially, the other could gift some assets to them to ensure they are provided for. Note that the 7 year rule applies here – if you don’t survive for 7 years after making the gift, it will fall into your estate for inheritance tax purposes. The tax rate is 40% of your estate on anything over your basic inheritance tax allowance (Nil Rate Band) although if the gift is made between 3 and 7 years before your death, this percentage is tapered.

Another option would be to take out an insurance policy to cover the additional Inheritance Tax that your estate will pay, as a result of leaving your partner a life interest in your share of the home. This policy can be written into trust to ensure it falls outside of your estate. The policy ensures there are immediate funds to pay the Inheritance Tax liability, which can provide a lot of relief particularly in estates where there is little available cash. However, such policies can be expensive in the long term.

Take action

Despite the fact that cohabitation is the fastest growing family type, English law continues to view cohabitation as ‘fundamentally different to that of a married or civil partnership couple’ (Burden v United Kingdom). Unmarried cohabiting couples represent 13.1% of the population (about 6.5 million) but many are unaware of just how few rights they have (see, ‘There’s no such thing as common law marriage!‘) Consequently, cohabitees often neglect to make a Will, leaving loved ones high and dry.

Cohabitees need to carefully consider how they can provide for their partner after their death and the inheritance tax consequences of the few options available to them. Whilst the inheritance tax may feel like an unfair burden, it is the price of retaining control of your assets and ensuring that your children ultimately benefit.

You may also like: Unmarried couples – legal essentials and Cohabitees: legal rights.

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