Suggest to ExH we enter into a civil partnership to avoid DCs paying IHT

[TemporaryDogMum]

I am looking at this from a purely financial viewpoint, not a relationship/romantic point of view, hence posting in Money Matters.

I got divorced around 15 years ago and am now in a happy and established long term relationship with someone else. I have no plans to marry my current partner and he does not want this either. I have two adult children with ExH who no longer live at home.

I own my own home which is worth around £500K and have a SIPP for retirement plus another £100K or so in savings/investments. I am self employed and hoping to retire in around 8 years time and will drawdown from my SIPP. Current DP is independently wealthy so my will leaves my entire estate to my 2 DC.

As a single person I know I have £325K standard inheritance tax allowance plus a further £175K of main residence allowance. In the next few years it is likely my property value alone will take me over that allowance and my pension will likely be brought into the scope of IHT in 2027.

My ExH is living in rented accommodation and is retired on a modest private pension plus state pension. Both his parents are deceased so he is unlikely to inherit anything at this point. We are on civil although not really friendly terms. He may have some pension to leave the children but I suspect will be well within his £325K inheritance tax band.

It has been suggested to me that in order to reduce the Inheritance Tax bill my DC may be liable for in the future I should enter into a civil partnership with ExH in order to add his unused IHT allowance to mine. He is older than me by 10 years so likely to pre-decease me (although obviously this isn't guaranteed). We would obviously not actually live together - I'm not sure if that matters?

He has left everything in his will to our joint DC and lives a very solitary lifestyle so I think it is unlikely he will remarry. Our 2 DC are his whole world so I am confident he would put their needs first with any financial decisions.

Thoughts on the practical pros and cons of suggesting a civil partnership with Ex H?

Civil partnership is marriage in all but name. This is the equivalent of marrying him again, having presumably got divorced for a reason.

Instead… start offloading some assets off to your DC now. Pay them both a set amount each month to help with their bills. Whatever you can afford. HMRC says it must come out of your disposable income.

I agree. I don’t think she could have carried it out without committing serious fraud. And I note that in her replies she’s still totally up for it in principle, just isn’t going to do it because of ‘messiness’.

Absolutely this.

I don’t understand your ‘disadvantage’ point at all, which you keep repeating. Your children are no more disadvantaged than children who have already had one married parent die and then go on to lose the other. They inherit at that point and therefore have to pay IHT. Your kids (if you don’t dodge it), also pay when they inherit, it’s just that they’re set to inherit from 2 different people. But there’s no logical reason why they will be paying any more overall.

in fact, come to think of it, are they not in fact advantaged, as by inheriting 2 theoretical separate amounts there is more chance of each pot being kept below the threshold?

I’m glad I’m not the only person who finds this attitude selfish.

Not necessarily, you can name anyone as your NOK

OP explained it quite clearly with numbers. Married couples have double the allowances. Her ex is renting and does not have any assets to pass on as presumably OP was given the home which on its own is now using up all her allowance and will drag her into IHT soon without any additional assets.

From next year pensions will be added on as well. You need to have a £1m pot for a comfortable retirement, yet if you kick the bucket before you retire, the government will take 40%.

For all those saying we want services but are not willing to pay for them - we are one of the countries with the highest marginal tax rates but our services are some of the worst and most expensive.

Something does not add up.

There’s no fraud involved.

Which law do you think this breaks?

Fraud requires false representation. There’s no legal requirement for civil partners to cohabit, to like each other, to not to live with others, to be entered into for romantic reasons, etc.

She could write to HMRC and tell them she did it for tax planning purposes. It would be like writing to them to tell the trust you set up was for tax planning purposes. Yes, and?

It’s not the same as immigration law.

This is a plain misunderstanding of the IHT rules and exemptions. If we remain separated exH's unused allowance dies with him, if we are in a civil partnership it transfers to me and my DC would benefit from it on my death (assuming he dies first but it would equally work vice versa if I died first). Single parents and unmarried parents are disadvantaged by the current set up - hence writing to my MP to ask for a review. For a number of reasons (work related) I do quite a bit of work in this area and I'm not the only one who sees the inequality, hence the idea this was suggested to me. Married couples and those in a civil partnership have distinct tax advantages.

Your planning on doing all that just to dodge the tax ? Doesn't sound like a good plan at all.

Are you bonkers. Your civil partner could make a claim claim on your house, money, pension if they wanted to ... by divorcing you again.

Dont be ridiculous, loads of people marry/enter civil partnerships for tax reasons.

You can make out a power of attorney for your children to do that.

Why are people saying it’s avoidance! Marrying to manage tax affairs and deathbed marriages are commonplace, perfectly legal and imo just good old financial management. Managing your money in line with guidelines.

Again important to remember that this is money that has already been taxed, unlike money received in benefits for example.

People are now being penalised for taking responsibility for themselves. From 2027 if you die over 75 then not only will you pension pot be included for IHT purpose but beneficiaries may also have to pay income tax on it.

OP is spot on with this but I would be (will be) passing money to DC.

No other country, at least not OECD, has as punitive IHT as UK, both in terms of threshold and percentage.

Pensions were the main vehicle for estate planning.

Thanks to Labor to overall tax on pension, assuming you die after 75, will be 64% (40% IHT and then 40% of income tax paid by DC) or even 78% if your DC are on 100k+ of their own income.

Outside of pension the estate has been taxed already, assuming you paid 40% before you accumulated your assets and then add 40% of IHT it's 64% as well.

TBH, it makes sense to pass everything on as soon as kids can deal with the money and you still have some reasonable life expectancy.

Exactly this.

FGS OP - just pay the tax and stop looking for ways to evade/avoid it. This is the same tax that pays for the healthcare your family and you use (and will use more of as you age, along with the social care you very well might need), the roads you drive on, the emergency services you might need, the refuse collection you use, the schools and nurseries you probably used, etc etc etc etc etc. I'm sick and tired of people who look for ways to get out of contributing to their fair share of tax to pay for the services needed to run the country. Doesn't matter if you're Amazon or someone like the OP - pay your bloody tax.

I do pay my tax - always have and always will. I object to my DCs paying more IHT than their peers with married parents. The inequality is my issue - not sure how much clearer I can make it.

You can object, but ultimately that's the way the law is set up - and if everyone operated within that and paid the tax that's required then we'd have more money for key services that everyone wants and complains about when they can't get them. At the moment you're simply looking for ways to circumvent them in the same way other people look for ways to circumvent other laws.

Sounds risky on many levels. And all because of something that may happen when you die.

When people think that tax laws are unjust, they will try to find ways to offset the injustice. That's natural. And not remotely immoral. The immorality is in excessive or unequal taxation, which is state-backed theft.

OP, I'm glad you've decided against this. It seems like a bad idea. As you've suggested, give money to your children during your lifetime. Just a warning: someone on here suggested signing your house over to your children. That wouldn't work if you still live in it: it would be a "Gift with Reservation of Benefit" which means it would remain in your estate for IHT.

The effect of IHT which I find worst is that if a parent dies early with more of the money they've set aside for their pension left, the child is taxed on all that. So not only do they lose their beloved parent, and the support and help they would have had from the parent over the decades, even the money which the parent would have given them freely if they had lived is punitively taxed. Stealing more from those bereaved early.

It's a tax that capitalises on the fact we can't know the time of our death. I find it morally abhorrent.

I completely agree with you OP. When anyone gets married are 'dodging' tax - why should this be any different? If you and your ex were living apart but never formally divorced then I don't see everyone would clamouring for you to make the divorce official ASAP so as not to defraud the country!

Your children shouldn't lose out because you and your ex are no longer in love.

The disadvantage here though isn’t due to you being unmarried, but due to the fact that you exH doesn’t have enough assets to take the inheritance from his side close to the threshold. If he had similar amount of assets you would both pass on the same amount as a married couple.

While you cannot deliberately reduce your assets to avoid care home fees if you do it for other reasons then it may not be caught by the regs particularly if the gifts are many years before you need care. In quite a number of cases the care given is usually identical whether self funded or met by the council.