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Ways in Which Cohabiting Couples can Avoid Inheritance Tax

Inheritance Tax is not something that only the uber rich need to bother about. Your beneficiaries may have to face its consequences if your estate is worth more than the specified threshold, £325,000 for 2012-13, when you die. It is more of a problem if you are in a cohabitation arrangement. 

Couples living together, unlike married couples or civil partners, cannot gift their estates to each other or cannot use their tax allowance to avoid Inheritance Tax. If you are in a cohabitation arrangement, you may have to pay Inheritance Tax on anything, which is beyond the tax threshold, you inherit from your live-in partner.

Moreover, couples and civil partners may avail of doubled tax allowance. Therefore, their estate may be worth £650,000 without any tax consequences. This is not available if you are in a cohabitation arrangement. However, with a little planning, and a little help from a competent solicitor, it may be possible to avoid this tax.

The first task is to find out whether your estate is above the tax threshold. For this, you have to consider the assets you own, alone as well as with your partner. You need to subtract the amount you owe from this figure to get an estimate of your property value.

Make a will and keep it up-to-date. Before you take any steps regarding lowering the value of your estate to come within the tax threshold, determine the people you want the assets to go to after your death.

It is a good idea to pay regularly for life insurance coverage. Nominate your partner as your beneficiary for this and they will not need to pay any Inheritance Tax on it. Regular payments out of income exemption are exempt from this tax.

Ensure that the death benefits you are eligible for, e.g., life insurance, are not within your estate. It is easy to do this; just nominate the person or organisation on the death benefit and it would not be considered as part of your estate.

Make sure the estate is as near to the tax threshold as possible. This will help to utilise the tax allowance. If you want to equalise your estate with your partner, there may be other tax implications. Seek legal advice before you take any step in this regard.

Use the potentially exempt transfers to gift assets to beneficiaries during your lifetime. Avail of exemptions on giving annual gifts worth £3,000, small gifts worth £250, gifts on marriages and civil partnerships, and so on.

Gifting to your partner or children may be a good way to provide for them without burdening them with taxes. However, keep in mind that these exemptions will be available only if you survive the gifting by seven years.

You may also consider a revision of the cohabitation agreement to include property related details if the value of your or your partner’s estate is more than the tax threshold. Discuss the details with a solicitor before you modify the terms of the agreement to ensure its validity. Author Bio:Duncan Gallagher is a professional consultant who offers advice on a wide variety of issues. He provides tips and suggestions regarding the ways in which cohabiting couples may avoid Inheritance Tax.


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