Unmarried couples often face different estate planning challenges from spouses and civil partners. While many of the same trust structures are available, the inheritance tax consequences can be very different. In this case, an unmarried couple wanted to ensure that the surviving partner could remain living in their home while ultimately preserving their respective estates for their own children. The case highlights why property trust planning for unmarried couples requires careful consideration of both tax efficiency and the survivor’s security.
Property Trust Planning for Unmarried Couples – The Background
The couple were aged 64 and 63. They owned their mortgage-free home in equal shares. Its estimated value was £160,000, meaning that each partner’s share was worth approximately £80,000.
Excluding pension benefits, their estimated estates were:
- Older partner: £330,000, comprising an £80,000 share of the home and approximately £250,000 of other assets.
- Younger partner: £300,000, comprising an £80,000 share of the home and approximately £220,000 of other assets.
Each partner wished to leave the remainder of their estate to their own children. They also wanted to ensure that the survivor could continue living in the property following the first death.
The main question was whether the deceased partner’s share of the property should pass into a Property Protection Trust or a discretionary trust.
Why Does Being Unmarried Matter?
Transfers between spouses and civil partners are exempt from inheritance tax under the Inheritance Tax Act 1984. This exemption does not apply to an unmarried partner, regardless of how long the couple have lived together.
Married couples and civil partners may also transfer unused portions of their inheritance tax allowances to the survivor. These include:
- the nil rate band, which is the amount that can ordinarily pass without inheritance tax and is currently £325,000; and
- the residence nil rate band, an additional allowance that may apply when a qualifying home passes to direct descendants, such as children or grandchildren.
Unused allowances cannot be transferred between unmarried partners.
Cohabiting couples may therefore face inheritance tax on the first death and cannot rely on the survivor receiving the deceased’s unused allowances.
This highlights why property trust planning for unmarried couples often differs significantly from planning for spouses and civil partners
Property Trust Planning for Unmarried Couples: The options
Although the couple’s objectives were clear, there was more than one way of achieving them each with different inheritance tax implications. The two main options were considered below.
Option One: A Property Protection Trust
A Property Protection Trust would give the surviving partner a formal right to occupy the deceased’s share of the home, usually for life or until an event specified in the will. The deceased’s children would inherit that share when the survivor’s right ended.
On the assumption that the older partner dies first, on his death his £80,000 share would enter the trust, while his remaining assets of £250,000 would pass directly to his children.
On the assumed figures, his estate would be £330,000. After applying the £325,000 nil-rate band, £5,000 would remain taxable. At the inheritance tax rate of 40%, the liability would be £2,000.
The residence nil-rate band would not be available against the property share on the first death. Although the deceased’s children would eventually inherit it, the surviving unmarried partner would first receive a life interest. For inheritance tax purposes, the survivor is normally treated as inheriting the trust property.
On second death. the £80,000 trust share would be combined with the survivor’s own estate:
- Survivor’s own estate: £300,000
- Deceased partner’s property share in trust: £80,000
- Total for inheritance tax purposes: £380,000
- Nil-rate band: £325,000
- Balance before the residence nil-rate band: £55,000
The survivor’s own £80,000 share of the home would pass to her children under the terms of her will. As they are her direct descendants, that share could allow residence nil rate band of up to £80,000. On the assumed figures, this would eliminate liability.
The deceased partner’s children are not the survivor’s direct descendants. His trust share would not therefore qualify for the residence nil rate band in her estate.
Option Two: A Discretionary Trust
Alternatively, the older partner’s £80,000 property share could pass into a discretionary trust. The surviving partner, the deceased’s children and potentially other descendants could be included as beneficiaries.
A discretionary beneficiary has no automatic right to trust property. Instead, the trustees decide who may benefit, when and on what terms. The trustees could allow the survivor to occupy the home rent-free, guided by a letter of wishes from the deceased.
The first-death calculation would remain the same: the £330,000 estate would exceed the £325,000 nil-rate band by £5,000, producing an inheritance tax liability of £2,000.
The difference arises on the survivor’s death. The discretionary trust’s property would not form part of her estate simply because she was a potential beneficiary or had been allowed to occupy the home under the trustee’s discretion.
Her estate would therefore remain approximately £300,000, below the current £325,000 nil-rate band. On those assumptions, no inheritance tax would arise on her death.
Flexibility Versus Certainty
The potential tax advantage of a discretionary trust must be balanced against the survivor’s security.
Under a properly drafted Property Protection Trust, the survivor has an enforceable right to remain in the property, subject to the trust’s terms. Under a discretionary trust, continued occupation depends on the trustees exercising their powers in the survivor’s favour.
A detailed letter of wishes could explain that the survivor should normally be allowed to occupy the home rent-free. However, a letter of wishes guides the trustees and is not legally binding.
Discretionary trusts also fall within the inheritance tax “relevant property regime”. This can produce charges on each ten-year anniversary and when assets leave the trust. Given an initial trust value of £80,000, those charges would likely be nil, although future increases in property value would need to be monitored.
The Relevance of Pension Benefits
Pensions were a significant unresolved part of the couple’s financial position. Most registered pension benefits currently fall outside an individual’s estate for inheritance tax purposes.
The Government intends to bring most unused pension funds and death benefits within the inheritance tax regime from 6 April 2027. If implemented as proposed, substantial pension funds could increase the estates of both partners and make the distinction between the two trust options more important.
Conclusion
There is no single solution that is suitable for every cohabiting couple.
On these figures, the discretionary trust offered potential inheritance tax advantages by keeping the deceased’s share of the property outside the survivor’s estate. However, those tax benefits must be weighed against the greater protection and certainty that a Property Protection Trust can provide. Effective property trust planning for unmarried couples requires consideration of both the financial and practical consequences of each option.
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This article is provided for general information only and does not constitute legal advice. Any advice, wording or clauses referred to are illustrative and should not be relied upon as precedent without full consideration of the client’s circumstances, the will as a whole, and the law in force at the relevant time.
