With growing numbers of estates being subject to inheritance tax (IHT), those with significant assets are increasingly looking for ways to reduce their tax liability and pass on more to their loved ones. One of the most valuable IHT allowances in the UK is the spouse exemption, but if you are not married or even in a relationship, can you marry a friend to secure the tax benefits instead?
IHT and the spouse exemption
The spouse exemption remains one of the most powerful tools in inheritance tax planning. Under current legislation, assets passing between spouses are fully exempt from IHT, regardless of value. This exemption can represent enormous savings – on an estate worth £2 million, for instance, the potential IHT saving could exceed £600,000. Moreover, the surviving spouse inherits their deceased partner’s nil-rate band, currently set at £325,000. This effectively doubles the tax-free threshold to £650,000 when the second spouse eventually passes away.
The mechanics are straightforward: marry someone, and your entire estate can pass to them IHT-free upon your death. The survivor then benefits from both nil-rate bands when their time comes. From a purely mathematical perspective, the attraction is undeniable.
Is the marriage a sham?
From a strictly legal standpoint, there is nothing to prevent you from marrying a friend to achieve tax advantages. The validity of a marriage in English law depends on compliance with formal requirements and the absence of legal impediments – not on the underlying motivations of the parties.
The concept of a “sham marriage” exists in immigration law, where marriages entered into solely to circumvent visa requirements constitute a criminal offence punishable by up to 14 years’ imprisonment. However, this definition does not extend to tax planning purposes. Many couples who philosophically oppose the institution of marriage nevertheless proceed with formal ceremonies purely for tax benefits, and such arrangements are entirely legitimate.
Civil partnerships offer identical tax treatment and might appeal to those who prefer to avoid the traditional marriage framework.
What are the risks?
Despite the apparent simplicity of a marriage of convenience, it is not without risk. Marriage creates a comprehensive legal relationship with financial consequences that extend well beyond inheritance tax planning.
The most obvious risk lies in potential divorce proceedings. Should either party later wish to marry someone else, or you have a serious fallout, your friend could file for divorce and pursue a financial settlement. The courts have broad discretionary powers to redistribute assets between divorcing spouses, potentially resulting in a transfer of wealth in your lifetime that is out of your control. Taking legal advice before the marriage is therefore essential and a prenuptial agreement may be recommended.
Pensions add another layer of complexity, particularly for those with final salary schemes. These pensions, known as defined benefit schemes, typically provide survivor benefits to spouses, but trustees often retain discretion over payments. Many schemes include provisions that may limit or exclude benefits where marriage occurs after retirement or in circumstances suggesting a marriage of convenience. The timing and circumstances of any marriage would likely receive scrutiny from pension trustees, who have fiduciary duties to protect scheme assets.
Even without divorce, the spouse exemption will only apply to lifetime and testamentary gifts to your husband or wife. This means that gifts to other friends or family members that exceed your nil rate band could be subject to tax. Careful planning is therefore required including a joint strategy for the distribution of your estates when you have both passed away. Wills should also be reviewed regularly and Lasting Powers of Attorney put in place.
Is marriage the only way?
Whilst a marriage of convenience might appear to be a good idea, there are many more conventional tax planning options if you have a close friend who you would like to benefit from your estate. These include making lifetime gifts within the annual exemption, regular gifts out of excess income, or larger gifts to friends that will become exempt from IHT if you survive for seven years.
While marrying a friend for inheritance tax purposes is legally permissible, it is a high-risk strategy that can have some serious unintended consequences. Anyone considering entering into a marriage of convenience as a tax planning tool should take legal and financial advice before taking their friendship to the altar.