I’m dying. Could my son’s fiancée become my civil partner to save £4.82m in IHT?

Property118 I’m dying. Could my son’s fiancée become my civil partner to save £4.82m in IHT? I am dying, and I am trying to stop my death forcing my son to break up the family business. I have a stage 4 terminal illness, very little time left, and an idea involving his fiancée which I know many people will find uncomfortable. I am an elderly widower with one son and three grandchildren. The legacy I want to leave them is a residential rental portfolio worth approximately £8.8 million, entirely free of mortgages. My other assets are around £1.9 million in cash-based investments and my family home, worth approximately £2 million. That puts the estate at about £12.7 million. Even if my estate can use the full basic inheritance tax allowances available from both me and my late wife, leaving everything directly to my son could produce an IHT bill of approximately £4.82 million. The cash-based investments would fall well short of covering it. I want my son and his family to inherit the security of a debt-free business. The thought of them having to sell properties or mortgage the portfolio simply to pay the inheritance tax on my death is deeply upsetting. The business could support them for years, but a bill of that size would inevitably affect the choices they have to make. After reading Property118’s article, Why gifting a rental property can bring a tax bill approaching 64% , I have been thinking about the very different treatment of transfers between spouses and civil partners. A plan which depends on my surviving another seven years offers little reassurance in my circumstances. My son is engaged to the mother of his three children. They have a very solid relationship, and I trust her completely. She is already central to the family whose future I want to protect. The idea I am considering is entering into a civil partnership with her before I die. I would leave my son assets covered by the inheritance tax nil-rate bands available to my estate, including whatever unused allowance can be transferred from my late wife. I would leave everything else outright to his fiancée, who would then be my surviving civil partner. If the full combined basic allowance of £650,000 is available, that would mean £650,000 passing directly to my son and approximately £12.05 million passing to her. My hope is that the latter inheritance would qualify for the spouse and civil partner exemption. I understand the significance of the word “outright”. The assets would belong to her, and my son would not automatically own them simply because they are engaged. My trust in her is complete, but I need to understand the legal consequences as well as the tax position. There is an obvious question about their future. Once I had died, could she still marry my son, despite having become his stepmother through our civil partnership? Would their ages or any other aspect of their family history affect the answer? I also want to understand what would happen to the properties for capital gains tax purposes. Would their tax values be reset to market value on my death, even if no IHT were paid on the inheritance passing to her? If the family later chose to sell some properties, would that mean the gains accumulated during my ownership were no longer part of the calculation? It might also make sense for them to consider a Family Investment Company , with arrangements for managing the business and involving the children as they grow older. If the inherited rental portfolio were transferred into such a company, how much stamp duty would be payable, and how would that compare with the inheritance tax bill? I appreciate that there are questions beyond the headline figures. Would forming a civil partnership affect the unused allowance from my late wife? Could any promise or agreement that the assets would eventually pass to my son affect the exemption? What would happen if she died, became unable to manage her affairs, or their relationship changed? I would also welcome a clear explanation of DOTAS, the disclosure rules for tax avoidance arrangements, and the General Anti-Abuse Rule. Do either of them prevent what I am considering, or require it to be reported to HMRC? Given how little time I may have, I need to understand the implications for my will, the requirements for capacity and consent, and whether the necessary legal steps could be completed. I do not want my family to inherit a dispute along with the properties. I know some readers will find the proposal extraordinary. For me, it begins with a much simpler concern: I want my son and three grandchildren to have the security this business can provide after I have gone. Is there a lawful way for this proposal to achieve that, and what might I be overlooking? Name withheld. An editorial note from Mark Alexander This Reader’s Question is based on my recollection of a true story, except for the parts I have completely invented. My response is a genuine examination of the tax and legal issues arising from the circumstances described, subject to the assumptions and qualifications explained in that response. Response from Mark Alexander – Founder of Property118 I am very sorry to hear about your illness. Your figures explain why preserving the business matters so much: an £8.8 million debt-free rental portfolio could provide lasting security for your son and grandchildren, while a substantial tax liability could force difficult decisions about sales, borrowing and the family home. The inheritance tax bill on the figures supplied Taking your figures as the estate values, assuming the full £650,000 combined basic nil-rate band is available and ignoring further deductible liabilities, expenses, earlier gifts and other reliefs, a direct inheritance by your son produces the following illustration. The standard IHT rate is 40% . Estate and IHT calculation Amount Residential rental portfolio £8,800,000 Cash-based investments £1,900,000 Family home £2,000,000 Total estate £12,700,000 Less combined basic nil-rate bands £650,000 Estate subject to IHT £12,050,000 IHT at 40% £4,820,000 Value remaining after IHT £7,880,000 At £12.7 million, the residence nil-rate band is fully tapered away, even if the maximum combined residence allowance would otherwise be available. The taper measures the whole net estate before spouse exemption. Ordinary residential investment letting generally falls outside Business Relief , irrespective of the portfolio’s size or the work involved in running it. Even if all £1.9 million of cash-based investments could be realised and applied to the bill, that would leave a £2.92 million funding gap. That explains your concern about selling or refinancing, although the availability of instalments and future rental income should also be examined. What the civil-partner exemption could change Under section 18 of the Inheritance Tax Act 1984 , a qualifying inheritance by a lawful spouse or civil partner is generally exempt. There is no seven-year survival requirement or minimum duration of partnership. Assuming a valid civil partnership, a qualifying outright legacy and both parties being long-term UK residents for IHT purposes, £650,000 could pass to your son within the available basic allowances and the £12.05 million residue could pass to your civil partner exempt from IHT. A new civil partnership does not itself cancel the transferable allowance from your late wife . The available percentage, earlier gifts and the necessary claim still need checking. The £0 IHT outcome below is conditional on the full arrangements qualifying, including the ownership and anti-abuse issues discussed later. Death rebasing could make sales or a FIC transfer practical For personally owned properties, section 62 of the Taxation of Chargeable Gains Act 1992 normally gives the estate and beneficiaries a market-value acquisition cost at death, without a CGT charge on the death itself. This applies even where spouse exemption means no IHT is paid. It would also normally apply to a direct inheritance by your son. For example, a property bought for £100,000 and worth £500,000 at death would normally have a £500,000 inherited tax cost. A later sale for £525,000 would start with a £25,000 gain before costs and adjustments. The £400,000 gain accumulated during your ownership would no longer enter that calculation. Applied to your portfolio, if the inherited properties were worth £8.8 million at death and transferred to a connected FIC at the same individual market values, there would normally be no post-death capital gain to charge. Proper valuations are essential. If a company already owns the properties, inheriting its shares rebases the shares rather than the company’s underlying buildings. The SDLT on an £8.8 million transfer Where six or more separate dwellings are acquired in a single transaction , section 116(7) of the Finance Act 2003 treats that transaction as non-residential for SDLT. The condition concerns the dwellings transferred together, rather than simply how many properties the family owns. This illustration assumes the £8.8 million portfolio comprises at least six separate dwellings in England or Northern Ireland, transferred in one transaction at unchanged market values. On that basis, the non-residential bands apply as follows. Slice of £8.8m value Rate SDLT First £150,000 0% £0 Next £100,000 2% £2,000 Remaining £8,550,000 5% £427,500 Total SDLT £429,500 That is an effective SDLT rate of approximately 4.88% of the portfolio value. The calculation uses the aggregate £8.8 million, with the bands applied once. It assumes a transfer of existing ownership interests, rather than the grant of new leases. The £2 million family home is outside the proposed FIC transfer. The portfolio’s debt-free status does not remove this charge: the connected-company market-value rule can apply even where no cash consideration changes hands. Wales and Scotland have different land transaction taxes. Comparing the immediate costs Illustrated route Immediate tax cost Direct inheritance by son; assets retained personally £4,820,000 IHT Qualifying civil-partner inheritance; assets retained personally £0 IHT Qualifying civil-partner inheritance, then £8.8m rental transfer to FIC £429,500 SDLT Comparing direct inheritance with the qualifying civil-partner inheritance followed by the FIC transfer gives an immediate tax-cost difference of £4,390,500 : £4,820,000 less £429,500. On these assumptions, the combined value retained by the beneficiaries and their company would be £12,270,500 after SDLT, compared with £7,880,000 after IHT on direct inheritance. These figures exclude professional fees, administration costs, later tax and changes in value. The IHT calculation covers the whole £12.7 million estate; the SDLT calculation covers only the £8.8 million rental portfolio. The civil-partner exemption would address the IHT on your death. A subsequent FIC transfer would be a separate decision about how the next generation wishes to own and run the business. If the £650,000 legacy to your son were paid from the £1.9 million of cash-based investments, £1.25 million would remain within the residue. If those investments were fully realisable at the stated value, funding £429,500 of SDLT would leave £820,500 of that cash, before other costs. That illustrates the potential to preserve the rental portfolio without external borrowing. A FIC can provide a framework for family control, ownership and future succession, with profits retained for reinvestment. It has its own tax liabilities, and extracting profits can create personal tax. Ordinary property investment shares do not automatically qualify for Business Relief. A genuine shareholder loan may be repaid as debt rather than as a dividend, but the loan remains an asset of the lender’s estate. The next generation would still have its own IHT planning to consider. Could your son subsequently marry her? On your son’s future marriage, the answer in England and Wales is yes in principle, subject to specific conditions. Section 1(3) and Schedule 1 of the Marriage Act 1949 permit marriage to a parent’s former civil partner where both parties are at least 21 and the younger was not, before turning 18, a child of the family in relation to the older. That means having lived in the same household and been treated by the older person as their child. Their having three children together is a different relationship and does not itself trigger that restriction. Your death would end the civil partnership . If the age, family-history and ordinary marriage requirements are met, the stepmother relationship would not itself prevent their marriage. Their solicitor and registrar should confirm the actual facts. Other jurisdictions require separate checking. Ownership, consent and the risks to the family The central practical risk is that the inheritance would belong to her. Your son’s engagement, their strong relationship and your complete trust do not give him ownership. Her death, incapacity, creditors or a later separation could change the outcome. Until they marry, having children together does not give your son the spouse exemption if she dies. An outright gift from her to your son before marriage would normally begin her own seven-year IHT period and could trigger CGT on growth since inheritance. After a valid marriage, qualifying transfers can generally be spouse-exempt for IHT and at no gain/no loss for CGT while they are living together for tax purposes. Those rules do not establish that every step of an advance arrangement will qualify. A promise, trust or binding obligation to pass assets to your son requires particular scrutiny. HMRC’s guidance on conditional gifts addresses restrictions on spouse exemption where the recipient must provide for someone else. Describing the inheritance as outright cannot override the actual legal obligations. DOTAS and GAAR On DOTAS, tax saving alone does not make an arrangement reportable. The relevant statutory hallmarks must also be met. In section 8.4.2, example 5 of its guidance , HMRC explains that a will leaving assets to an exempt spouse does not meet the first condition of the specific IHT hallmark: the will determines who inherits, rather than reducing the person’s estate. On the outright inheritance described, I do not identify a trigger under that specific hallmark. That is a qualified conclusion. The complete arrangements must also be checked against the confidentiality and premium-fee hallmarks where applicable, and any relevant hallmarks for additional transactions. Anonymity for this reader’s question does not itself constitute confidentiality about how a tax arrangement works. A premium fee need not actually be charged for its test to matter. Neither disclosure nor the absence of a disclosure obligation establishes that the tax treatment succeeds. GAAR is a different question. Because obtaining an IHT advantage is expressly a main purpose, this proposal falls within the concept of tax arrangements to which GAAR can apply. Counteraction requires the further conclusion that the arrangements are abusive under section 207 of the Finance Act 2013 . The test asks whether they cannot reasonably be regarded as a reasonable course of action, considering the legislation’s purpose, abnormal or contrived steps and any exploitation of shortcomings. Controversy or tax motivation alone does not establish abuse. A real civil partnership with genuine legal consequences and an actual outright inheritance provides an argument that the statutory exemption is being used as intended. Forming it with your son’s fiancée as part of an expected sequence benefiting your son is nevertheless a feature that must be assessed across the whole arrangement. I would not responsibly give an unconditional assurance that GAAR cannot apply, or assert that abuse has already been established. HMRC’s GAAR example D19 treats a genuine gift to a dying spouse followed by inheritance back, benefiting from death rebasing, as non-abusive on its facts. It supports the distinction between tax-efficient planning and abuse. It does not approve the different civil partnership and family arrangements proposed here. The will and the alternative funding options The civil partnership would create legal obligations immediately. If you live longer than expected, it continues and she cannot marry your son while it remains in force. In England and Wales, forming it normally revokes an existing will , subject to the exception for a properly drafted will in contemplation of that particular partnership. Free consent, independent advice and capacity for both the partnership and the will need careful attention; terminal illness alone does not establish incapacity. The £2.92 million gap after applying the cash-based investments should also be assessed against the portfolio’s net rental income and available payment terms. Tax attributable to qualifying land can be paid in ten annual instalments , with the first normally due at the end of the sixth month after death. Interest usually applies, although certain business interests can qualify for interest relief even where the investment exclusion prevents Business Relief. Eligibility is fact-sensitive, and selling an asset generally brings the outstanding attributable tax due. The assessment should use rent after tax, running costs and the family’s income needs, alongside the £1.9 million of investments already identified. Your family needs a coordinated private-client and tax review of the actual documents, including a written analysis of DOTAS and GAAR covering the full intended sequence. Exemption on your death would still leave the next generation with its own future IHT exposure. The decision should protect the family’s ownership and security as well as address the immediate tax bill. Note to readers Your circumstances may be less urgent and your ideas less controversial. You may simply have so many thoughts, questions and competing priorities that you are unsure what to do for the best. If that sounds familiar, use Property118 as your sounding board. We start by listening to your concerns and understanding what you want to achieve. We can then research the relevant options and present them clearly in writing, explaining the likely outcomes, practical implications and points to discuss with your professional advisers. The aim is to help you make an informed decision about your property business and your family’s future. BOOK YOUR CONSULTATION TODAY BASED ON A TRUE STORY. MOSTLY. This Reader’s Question is based on my recollection of a true story, except for the parts I have completely invented. My response is a genuine examination of the tax and legal issues arising from the circumstances described, subject to the assumptions and qualifications explained in that response. Mark Alexander The post I’m dying. Could my son’s fiancée become my civil partner to save £4.82m in IHT? appeared first on Property118 .