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Inheritance Tax Planning for Unmarried Couples with Children

Inheritance Tax Planning for Unmarried Couples with Children

When considering Inheritance Tax planning, many people will aim to reduce the liability payable by their children. However, the reliefs offered by the Residential Nil Rate Band are not available for all familial arrangements. Legal Director Sue Arrowsmith-Rodger and Trainee Solicitors Mhairi McAulay and Rose Grant consider the law as it stands, and the meaning of a child of the family.

What is the law?

The Residence Nil Rate Band was introduced in April 2017 and served to increase the Inheritance Tax allowance by up to £175,000 under certain conditions. To qualify, you must be passing on a residential property to a direct descendant. Your property must be passing to one of these groups on death, or on the second death if you are a married couple or a couple in a civil partnership.  The allowance will be limited if your estate is above £2 million.

For a more in-depth look at the rules surrounding the Residential Nil Rate Band, click here to read partner Chris Gardiner’s article.

Who is a direct descendant?

The law provides that a property must be passed to a “lineal descendant”. This most obviously refers to biological children, but also includes:

  • adopted children;
  • step children;
  • foster children; and
  • children over which the deceased had been appointed as a special guardian while the child was under 18.

These descendants’ children and spouses are also included. For clarity, the person inheriting does not have to be under 18 when inheriting the property.

What about alternative familial arrangements?

Many families will feel that the definition of “lineal descendant” excludes children in their families who they would like to benefit from the additional allowance of the Residential Nil Rate Band. Consider the below example:

Alison and Billie have been cohabiting together for more than 20 years, and want to know how the Residential Nil Rate Band would apply to their children.

Alison has two children for whom she is named on the birth certificates as their mother. Billie is not biologically connected to the children, nor have they formally adopted them. However, Billie helped to raise the children, and thinks of them as their own.

If Alison and Billie were married, and Alison passed away before Billie, Alison’s children would be able to claim the Residential Nil Rate Band on the home, as they would be deemed step-children. However, if Alison and Billie are unmarried, it seems that the children would not be able to claim the Residential Nil Rate Band on Billie’s death, as they do not fit into the definition of “lineal descendants”. This means that the estate may benefit from £175,000 less in inheritance tax allowance, which could result in an additional £70,000 of Inheritance Tax being payable.

Other areas of the law would deem Billie to be the parent of the children. Due to the growing prevalence of cohabitation between both same and opposite-sex couples, together with the normalcy of divorces and re-marriages, the traditional ‘nuclear family’ is now only one of an array of family structures. It may be that a child is raised by those not genetically related to them. This can be due to a number of reasons, such as the choice of the natural parent, their death or an inability of them to provide adequate care.

The law now recognises that a genetic parental link is not the only way in which an individual can establish themselves as a “parent”. The judiciary has recognised the diverse ways in which children are being raised today. The Supreme Court recognised that parenthood can be established through a “social and psychological” relationship with a child. Parenthood can be developed through the meeting of a child’s most basic needs, for example feeding, comforting and loving a child. As the child grows, it is demonstrated further through guidance, education, protection, and socialising of the child. Therefore, it is firmly accepted that a genetic link to a child is only one way to evidence parenthood, those helping raise the child have the right to be accepted as their parent. Through this form of parenthood, the unrelated child is often referred to as being accepted as a “child of the family”.

However, the law distinguishes between different types of parenthood. For example a “social and psychological” parent is not deemed a “parent” in terms of being financially responsible for the child after separation. This appears to be the case in respect of qualifying for the Residential Nil Rate Band, as evidenced by the list of direct descendants mentioned above.

Are there any possible solutions?

At present, there are limited methods available to ensure estate receives the benefit of the Residential Nil Rate Band.

Unmarried couples like Alison and Billie could get married or enter into a civil partnership, as this would mean that the non-biological parent becomes a step-parent.

If the children are still under 18, the non-biological parent could adopt them.  Additionally, the non-biological parent could foster the children, or be appointed as a guardian or special guardian by the court. However, these options are usually not suitable for blended families where other biological parents are still involved.

What should I be thinking about now?

Couples with children who do not fall within the definition of “lineal descendants” should be aware of the potential Inheritance Tax implications. Reviewing your Wills and your finances with tax planning in mind can help to reduce the Inheritance Tax liability on your death.

If your estate is just over £2 million, you may want to speak to a professional advisor about how you can reduce your estate to below this figure, to ensure that you qualify for the Residential Nil Rate Band allowance on death.

If you need more information or specific advice, please contact our Private Client team on 03330 430150.

About the authors

Sue Arrowsmith Rodger
Sue Arrowsmith Rodger

Sue Arrowsmith Rodger

Legal Director

Wills, Trusts & Succession

Mhairi McAulay
Mhairi McAulay

Mhairi McAulay

Trainee Solicitor


Rose Grant
Rose Grant

Rose Grant

Trainee Solicitor

Corporate & Commercial

For more information, contact Sue Arrowsmith Rodger or any member of the Wills, Trusts & Succession team on +44 1334 468622.