Could Inheritance Tax changes ever be extended to apply to cohabiting couples, siblings or friends living together?

Chris O'Callaghan

Changes to Inheritance Tax made on 6 February 2020 mean that the amount of money going to spouses or civil partners where a person dies without a Will has increased by £20,000 to £270,000 (before the excess is shared with their children).

This is a positive move for spouses or civil partners; but is there any prospect of legislative changes to assist the surviving member of an unmarried couple, or friends or siblings who have been living together? Chris O’Callaghan from Ronald Fletcher Baker’s private client team explores the situation. 

Despite a number of changes to inheritance tax over the years the position for the majority of people and estates remains the same. Inheritance tax is charged at 40% above an estate’s available nil rate band (currently £325,000) subject to additional exemptions and reliefs. Married couples or those in civil partnerships benefit from the spousal exemption which states that all assets passing between spouses on death (and in life) are exempt from inheritance tax. The survivor’s estate can then utilise the unused nil rate band from their spouse’s estate and in the right circumstances achieve a total nil rate band of £1 million. 

Recent developments might suggest that there is a move in the general direction of affording some relief from inheritance tax to those living together whether in a romantic or platonic context.

In 2008 the elderly Burden sisters claimed that they were the victims of discrimination because they were denied the inheritance tax relief available to married couples and civil partners (Burden v United Kingdom ECHR 08). They had lived together for over 30 years, owned their home jointly and had prepared wills leaving their estates to each other. They argued that it was discriminatory that the survivor would face a significant inheritance tax bill that would not be faced by the survivor of a marriage or civil partnership.

The European Court of Human Rights disagreed, and the case was dismissed. Many felt that the Burden sisters would have been better served arguing, not that it was discriminatory that they were not treated the same as spouses but that they were denied the possibility of entering into a civil partnership.

Civil partnerships like marriages are prohibited if the couple are within the permitted degrees of relationship. There are clear reasons for this in the case of marriage both scientific and moral. The debate has grown as to whether this is necessary in the case of civil partnerships. A failure to consummate a marriage is a ground for annulment and adultery is a ground for divorce. This is not the case with civil partnerships. Couples in committed platonic relationships can enter a civil partnership, free from the historic associations of marriage, and take advantage of the associated tax relief.

Is it fair to exclude platonic couples within the permitted degrees of a relationship?

In 2018 Lord Lexden tabled a proposed amendment of the Civil Partnership Act 2004 to make siblings eligible for civil partnerships if they are both over the age of 30 and had lived together continuously for a period of twelve years. He argued that “the cruellest aspect of the current state of affairs is the terrible situation that can arise when one member of the committed sibling couple dies… [it] often means that a home that had been shared for decades must be sold when the first sibling dies to raise the inheritance tax on his or her share.”

The proposed amendment was lost in the chaotic events in Parliament over the last two years and did not make it past a second reading in the House of Lords. 

Whilst the debate about sibling couples continues, the issue of opposite sex couples entering into civil partnerships has finally been resolved. On the 2 December 2019 The Civil Partnership (Opposite-sex Couples) Regulations 2019 came into force which allows opposite sex persons to form a civil partnership. This followed 5 years of legal action by Ms Steinfeld and Mr Keidan which culminated in the Supreme Court declaring the current act “incompatible” with their human rights.  Ms Seinfield and Mr Keidan were finally able to celebrate entering a civil partnership on the 31 December 2019.

With civil partnerships now open to all, we may see more people entering into civil partnerships solely to benefit from the spousal exemption. In 2017 in a move which was something of a rarity at that time,  long term friends Michael O’Sullivan and Matt Murphy - who lived together - married in Ireland. They described their marriage as  a “business agreement” which had been mutually agreed upon to avoid inheritance tax. Matt Murphy sadly died on the 14 January 2020 and Michael O’Sullivan will now be able to continue living in the house without having to raise money to pay inheritance tax.

On the same day, The Inheritance Tax 1984 (Amendment) (Siblings) Bill, also tabled by Lord Lexden, had its first reading in parliament. Undeterred by the stalling of his 2018 bill, he is now proposing to make all transfers of property between siblings on death exempt from inheritance tax provided the siblings have lived together for a period of seven years and are over the age of 30. The bill removes the need for siblings to enter into a civil partnership whilst ensuring they are entitled to the same tax relief enjoyed by spouses in certain circumstances.

We will be following its progress with interest over the coming months.

So, where does this leave the estimated 3 million couples cohabitating in the UK who continue to have very little legal recognition? Cohabiting couples face an array of difficulties aside from not being eligible for spousal tax reliefs. Cohabitees, irrespective of the length of their relationship, do not benefit under Intestacy Rules and could even face difficulties in registering the death of their long term partner.

Should the amendment in favour of siblings be enacted, the government may come under increasing pressure to introduce a similar relief for unmarried couples who have lived together for the same period of time. Even if the bill is not passed, the numbers of people who would be affected by the lack of legal protection for a surviving cohabitee may make it difficult for the government to avoid introducing some kind of protective legislation for too much longer. 

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