Justine McCluskey: “There is an argument that the inheritance tax regime has failed to move with the time”

The Office for National Statistics recently reported that more than half of women in England and Wales are entering their thirties without children. Fewer people are getting married, with cohabiting couples constituting the fastest-growing family type in the UK. In addition, more people are choosing to live alone, fewer people are having children, and those who do are likely to come to parenthood later than previous generations.  

There is an argument that the inheritance tax (IHT) regime has failed to move with the times, disproportionately benefiting those who conform to the traditional ‘nuclear family’ structure, without giving adequate consideration to a myriad of equally relevant life circumstances.  

Under the UK IHT regime, upon death each individual is entitled to a £325,000 tax-free threshold. For a married couple without children, upon death of the first spouse, that tax-free allowance may be transferred to the estate of the surviving spouse. This means a married couple benefits from a total tax-free limit of £650,000. An additional tax-free allowance of £175,000 is available to married people who leave their home to their children. Again, this is transferable between spouses, meaning that a married couple with children stands to benefit from a tax-free allowance of up to £1 million in respect of their combined estate. 

There is an obvious logic here – many view the wealth acquired over the course of a marriage as shared, and therefore don’t perceive assets passing to a spouse as an ‘inheritance’. It would also clearly be unpalatable for a grieving spouse to have to sacrifice their established quality of life for the purpose of meeting an IHT liability.  

However, marriage is no longer the only way in which one might build up a shared life with another, so should more recognition be given to the shared wealth that cohabitants may enjoy? One might also wonder whether children are the only beneficiaries of heritable property worth shielding from IHT.  

The crux of the issue is that there are fewer tax reliefs for unmarried or childless people. Nonetheless, there are many strategies available to those wishing to mitigate their potential exposure to IHT. Examples include making gifts to those with whom an individual wishes ultimately to share their wealth or leaving a legacy to charity. However, as with the modern family, there is no one-size-fits-all approach to tax planning. The appropriate strategy for each individual will depend on a plethora of considerations.  

At Shepherd and Wedderburn, we are well versed in assisting clients to identify and achieve their long-term goals, ensuring that their estate is maximised for their nearest and dearest, whoever they may be.  

Justine McCluskey is a solicitor in Shepherd and Wedderburn’s private wealth and tax team.