Inheritance Tax planning for LGBTQ+ couples

Regardless of whether a couple identifies as LGBTQ+, under the current tax legislation in England and Wales, the same tax treatment is expected to apply to married or civil-partnered couples. The rules may differ however in instances where couples are cohabiting.

This distinction is highly relevant, as the Office for National Statistics (2020) reported that among individuals over the age of 16 identifying as LGB 72.5% had never been married or in a civil partnership. This compares to 37.9% of the population over 16 as a whole (Office for National Statistics 2021). Clearly, with such a small proportion of LGB individuals married or in a civil partnership, it is important to understand the differences in respect of cohabiting compared to being married/civil partnered.

For married or civil partnered couples, there is typically a full IHT exemption for the transfer of assets between them irrespective of whether the asset is transferred during their lifetime or from their estate.

In the UK individuals receive a nil rate band (currently £325,000) which is the amount up to which transfers can be made without incurring any inheritance tax. There is an additional rule for couples who are married or in a civil partnership allowing them to transfer any unused percentage of this nil rate band from the deceased to the surviving spouse or civil partner.

It is worth noting that particular care needs to be taken if one spouse is domiciled outside the UK, or on second marriage as there are some complications and potential restrictions which would need to be considered.

For couples who are not married or in a civil partnership, lifetime gifts as well as the assets transferred on death could give rise to an IHT tax charge at a rate of up to 40%. Additionally, unmarried couples cannot transfer unused IHT nil rate band between them.

It should be recognised that broader estate planning considerations could be quite different for LGBTQ+ couples as family circumstances can often be more complex.

Intestacy rules

If an individual dies without a valid Will, whoever inherits their estate will typically be governed by the rules of intestacy. Under the intestacy rules, the standard position is that, on the first death, where an individual is married or in a civil partnership and has children, the surviving spouse inherits all or a set proportion of the estate, depending on the estate value, with the remainder being shared by the children. The division of assets varies depending on which part of the UK the deceased was domiciled in. If the person who died was married or in a civil partnership and has no children, the surviving spouse will inherit the deceased’s entire estate.

Whilst the above treatment might work for some couples; it might not be the desired outcome for others. Although children include adopted children for the purposes of the intestacy rules, it does not include stepchildren unless they have been adopted by their stepparent. This could be particularly relevant to blended families.

If the couple are not married or in civil partnership, the estate may be inherited by the individual’s parents or siblings rather than by a co-habiting partner, again, this may not be in line with the individual’s wishes.

For some LGBTQ+ people stigmatisation and adverse reaction to an individual’s LGBTQ+ identity may mean the individual wishes for their family to be excluded from benefiting from their estate. In such a scenario, again the intestacy rules are unlikely to align with the individual's wishes.

The importance of a Will

One solution to avoid the intestacy rules from applying is for each person to draw up a Will. A Will gives an individual the flexibility to distribute their estate in any way they choose and to anyone they choose, regardless of their legal relationship with that person, although an element of forced heirship still exists in Scotland.

It is important to note that some assets pass outside of the Will. This includes jointly held assets that may pass to the joint owner. Pensions and life insurance policies usually pass in accordance with a death benefit nomination.

In addition to peace of mind, drawing up a Will can also make a couple’s Inheritance Tax (“IHT”) position more efficient. This is particularly valid for couples that are married or in a civil partnership as spousal transfers are normally IHT free. The surviving spouse also inherits any remaining Nil Rate Band (currently £325,000) and, if available, the Residential Nil Rate Band from the deceased.

Whilst there is no strict requirement for a Will to be drawn up by a specialist, it is best practice for a solicitor to be involved in the process, especially where there is complexity around the family’s affairs. Poor drafting of a Will can cause issues and disputes following an individual’s death. Dealing with this after an individual’s death may result in additional legal costs and may result in the estate being distributed in a way that was not intended.

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*This article first appeared in Investment Chronicle