The 'spousal exemption' for inheritance tax

In the UK, married couples and civil partners domiciled in the UK pay no inheritance tax when they leave assets to their respective partner. Unmarried couples, partners, or cohabitees however do not benefit from this ‘spousal exemption’, meaning that inheritance tax is due when the owner of the property dies.

Two men attracted some media attention a few years ago when they decided to get married. Not a big deal usually, but they were getting married for the sole purpose of one being able to pass his house to the other, free of inheritance tax, using the spousal exemption.

These men, Michael and Matt, had been friends for many years. Matt was in failing health and was also losing his sight, and Michael had lost his house in the recession, so Matt asked Michael to move in with him. Matt had never married, and because Michael became his carer in later years, he decided he would like to leave Michael his house after his death.

But this left Michael worried about inheritance tax. Because they were just friends living together, Michael would have needed to have sold the home to pay for the inheritance tax bill, leaving him homeless.

Their solution was to get married, so that they could use the spousal exemption. This worked - when Matt died, his house was passed to his spouse, Michael, free of inheritance tax. This was of course perfectly legal, and suited both men perfectly.

With the law falling behind the variety of family and living arrangements that now occur, there may be more like Michael & Matt, entering into ‘business arrangements’ to obtain a spousal exemption for inheritance tax.