20 August 2012

Is it Better to be Married?

I would never tell a client whether it is better to be married!

I do think, however, that it is legitimate to ask whether it is better, from an inheritance tax viewpoint, for a couple to be married. The answer seems to be “yes”, but I cannot find a very simple way of explaining it. The best I can do is to set it out arithmetically. Let’s imagine a couple who each own £2,000,000, and let’s start with the worst case scenario, which is that they are unmarried and leave everything to each other:



What has happened here is that the total inheritance tax they have paid, £1,872,000 is extremely bad news, and is actually MORE THAN 40% of their total assets, even though 40% is the tax rate. The reason is that some of this money has been taxed twice, once when he died and again when she died.

(Don’t worry about the detail of these calculations, by the way, just keep an eye on the “total tax” number!)

Being married does protect against some of that tax. For example, a married couple could do this:



The total tax has reduced to £1,340,000: which is still a lot of money, but does at least seem ‘fairer’ than the first example in the sense that the tax comes out at 40% of the taxable portions of the estates. The tax saving is over half a million pounds and, significantly, none of it was paid on the first death – it was all postponed until after both had died.

Can an unmarried couple achieve that same bottom-line figure? Yes, they can: for example by incorporating discretionary trusts in their wills:


This third example has the same bottom-line as the married couple achieved. Notice, though, that there is one significant difference. This time some of the tax, £670,000, was paid on the first death. An unmarried couple cannot shield that until the second death, as a married couple can.