Love Is In The Air – What do inheritance tax changes mean for marriage and civil partnerships?

With Valentine’s Day nigh, it is a certainty that ‘Love is in the air, everywhere I look around’ (as goes the popular 70’s disco song by John Young).

Traditionally, 14 February would see a card and maybe even a gift exchanged between married couples, those in a civil partnership or unmarried couples. Marriage numbers in Scotland have been on a steady decline since the middle of the 20th century (dropping from a high during WW2 of 53,522 in 1940 to a more recent mid Covid times low of 24,284 in 2021). This trend is mirrored across the wider U.K.  

Whilst the government’s proposed taxation policy is not the most romantic of topics may it be the reason more couples decide to tie the knot and reverse this decline?

Rachel Reeves romanced the British public with the first budget of the new Labour government on 30 October 2024. This shock-and-awe budget proposed tax rises of £40bn to rebuild public services – principally the much-loved NHS – and plug a hole in public finances.  

Included within this budget were a number of notable changes to inheritance tax (IHT) the headline rate of which is 40%:  

• As of 6 April 2027, unused pension (with limited exceptions) and death benefits will be within the scope of IHT. Conventional wisdom in recent years had been for those who had worked hard to accumulate their pension pot to, on retirement, then use other assets in order to preserve the pension as a tax planning vehicle – essentially to transfer wealth onto their family free of IHT; and
• As of 6 April 2026, ‘business relief’ (BR) (previously called business property relief) will be restricted. Currently, BR provides 100% relief from IHT for unquoted share holdings and interests in a business (whether owned as a sole trader or in partnership) located anywhere in the world. The government intends to restrict the 100% relief to the first £1M of the aggregate value of business and agricultural property, with a lesser rate of 50% relief applicable thereafter. Broadly equivalent changes are being proposed to ‘agricultural property relief’ (APR) – a relief from IHT applicable to land in the U.K. occupied for the purpose of agriculture. That proposed restriction has provoked a passionate response from business owners and farmers, including mass gatherings and convoys of tractors driven into town centres.

These changes mean IHT planning is even more significant. 

So how can marriage or civil partnership help reduce your inheritance tax exposure? 

Well, an estate left to a spouse or civil partner is exempt from IHT. Meaning that an unmarried person may avoid or reduce an IHT liability on their death by alternatively marrying or entering a civil partnership with their partner if they intend to leave them all or part of their estate.  

Not only is there a spousal exemption, but spouses/civil partners also benefit from any unused share of key IHT reliefs, with the nil rate band (NRB) and residence nil rate band (RNRB), being transferable between them. This prevents key IHT reliefs being lost or used up – unlike if couples are unmarried / not civil partners.  You may therefore want to consider a ring rather than a card this Valentines Day! 

Getting early advice regarding IHT and the structuring of your will is vital.  For those with blended families, wills can also be structured to meet the needs of different beneficiaries including with options for flexible trusts.  All of which can be tailored to your family’s composition and needs.

Whilst some of the reliefs mentioned are transferable, it is likely that the £1M aggregate value of business and agricultural property relief will not be transferable between spouses (unlike the NRB and RNRB). Therefore, in advance of the the proposed changes to BR and APR coming into force, it would be advisable for business owners and farmers to seek advice and consider appropriate changes to their wills. Otherwise, this valuable relief may not be accessed. 

So those spouses / civil partners – with business and farming interests – who fail to proactively review and change their wills (should they leave everything to the other – which until now is commonplace and conventional planning) would forfeit £1M of relief.  A sting in the tail for inaction and perhaps one that the government is counting on – very much a honeymoon hangover! 

All of this demonstrates the U.K. has a great many IHT exemptions and reliefs. IHT is a complicated system and one raising increasing amounts of money for the government (up from £2.38Bbn in 2009 / 10 to £7.5bn in 2023 / 24 and projected to be closer to £14bn by the end of this decade!).

Often working closely with your accountant, stockbroker and / or wealth adviser, it is possible for us to structure your affairs to maximise your access to those exemptions and reliefs.  Consider also whether a pre-nuptial or down the line a post-nuptial agreement is required (for you or your married / civil partnered children should you decide as one course of action to cascade wealth down a generation).

John Young’s song went on ‘And I don’t know if I’m being foolish, don’t know if I’m being wise’. Certainly, in light of the government’s general direction in relation to IHT, and the fragility of the U.K. economy’s ability to generate tax receipts, it would be foolish to ignore planning and wise to review your existing arrangements, keep a close watch on future developments for those with pension pots, and take action now for those with business and farming interests.   

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