Understanding Inheritance Tax (IHT): What Every Hackney Resident Should Know
Inheritance Tax (IHT) has a nasty habit of creeping up on families just when they least expect it. Whether you’re single, in a long-term relationship, married, or in a civil partnership, it’s crucial to understand how your decisions today could impact your estate tomorrow. If your estate is worth more than £325,000, you should be thinking seriously about IHT implications. For those unsure about where to start, a trusted Hackney Accountant can help you plan ahead and minimise the tax burden.
When Gifts Become Tax Traps
A recent case we came across involved a young man who transferred ownership of his property to his partner. This type of transfer is known as a “Potentially Exempt Transfer” (PET). A year later, they got married — and sadly, he passed away just a year after that.
Despite the marriage, the timing of the gift meant the estate was still liable for Inheritance Tax. Why? Because the donor did not survive the required seven-year window from the date the gift was made. If he had waited until after the marriage to transfer the property, the gift would have qualified for a spouse exemption — and no IHT would be payable.
This example serves as a strong reminder: even long-term partners can face unexpected tax charges if proper planning isn’t done in advance.
Insurance as a Safety Net
One often-overlooked solution is taking out a life insurance policy specifically to cover any potential IHT liability arising from a gift. This can provide peace of mind during the seven-year period and protect your loved ones from an unexpected financial hit.
Joint Tenancy: A Hidden Risk
If you own property with someone else as joint tenants, you both have equal rights. Upon one partner’s death, their share automatically transfers to the surviving owner. But here’s the catch: even though the ownership passes on, the survivor may still face an IHT charge based on the value of the deceased partner’s share.
This situation is especially common among cohabiting couples and family members who jointly own homes but don’t realise how inheritance tax applies to such arrangements.
Civil Partnerships vs. Living Together
Being in a civil partnership offers legal protection similar to marriage — including full exemption from IHT on assets passed between civil partners. On the other hand, simply living together (no matter how long) does not provide any IHT exemption.
This means that even if you’ve shared a home and finances for decades, if you’re not married or in a civil partnership, your partner could face a significant tax bill if you pass away. It’s a painful and avoidable outcome that proper planning can prevent.
What Happens When There’s No Will?
If someone dies without a will, the rules of intestacy apply. A surviving spouse or civil partner is entitled to:
- All personal possessions
- The first £322,000 of the estate
- Half of the remaining estate
The remaining balance is shared equally among children and other direct descendants. However, this distribution might not reflect your personal wishes — another reason why estate planning is so important.
Plan Ahead with Professional Guidance
Inheritance Tax isn’t just a concern for the wealthy — it can affect anyone who owns a home, has savings, or wishes to leave something behind for their loved ones. From gifting strategies to insurance planning and will drafting, every detail matters.
Whether you’re in a relationship, cohabiting, or managing property jointly, working with an experienced Accountant in Hackney ensures you’re not leaving your estate vulnerable to unnecessary tax liabilities. Don’t wait for a wake-up call — start planning today.