Ricky Gervais, Marriage and the £56 Million Inheritance Tax Question, by Atef Elmarakby, Managing Partner at GOOD LAW INTL®

Why getting married can be one of the most effective estate-planning decisions an unmarried couple makes

Ricky Gervais has spent much of his adult life questioning the point of marriage. After more than four decades with his partner, author Jane Fallon, inheritance tax appears to have provided him with a rather compelling answer.

Recent reports suggest that Gervais, whose personal fortune has been estimated at approximately £142 million, is now contemplating marriage in significant part because of the inheritance tax consequences of remaining unmarried.

Behind the humour lies a serious estate-planning issue which affects not merely celebrities and the exceptionally wealthy, but thousands of unmarried couples across the United Kingdom.

The expensive myth of the “common-law spouse”

English law does not confer the inheritance tax advantages of marriage simply because two people have lived together for many years.

There is no general inheritance tax status of “common-law husband” or “common-law wife”.

A couple may have lived together for five years, twenty years or, as in the case of Gervais and Fallon, more than four decades. For inheritance tax purposes, that longevity does not convert the relationship into a marriage or civil partnership.

The statutory spouse exemption applies to transfers between people who are legally married or in a civil partnership.

That distinction can have enormous financial consequences.

What could happen to a £142 million estate?

Consider a deliberately simplified example.

Suppose an unmarried individual dies with a net estate of £142 million, leaves the entire estate to their long-term unmarried partner, has made no relevant lifetime transfers and no other exemptions or reliefs apply.

The ordinary inheritance tax nil-rate band is currently £325,000.

The broadly chargeable estate would therefore be:

£142,000,000 − £325,000 = £141,675,000

Applying inheritance tax at 40% produces a potential liability of approximately: £56 million

That is an extraordinary tax exposure arising principally because the recipient is a partner rather than a spouse or civil partner.

The position can be dramatically different following marriage.

The spouse exemption

Section 18 of the Inheritance Tax Act 1984 provides the fundamental inheritance tax exemption for transfers between spouses and civil partners.

Subject to important qualifications, particularly where the parties have different long-term UK residence positions, assets passing from one spouse or civil partner to the other can qualify for the spouse exemption.

Accordingly, where the exemption applies in full, an estate worth tens or even hundreds of millions of pounds could potentially pass to the surviving spouse without inheritance tax becoming payable on the first death.

This is why marriage can be an extraordinarily powerful estate-planning step.

But there is an important qualification.

Marriage does not necessarily eliminate inheritance tax forever

The spouse exemption is frequently better understood as a deferral mechanism, rather than an automatic permanent elimination of inheritance tax.

Suppose a husband leaves £100 million to his wife entirely spouse-exempt.

No inheritance tax may arise on that transfer.

But if the wife subsequently dies owning that £100 million, and leaves it to children, relatives or other non-exempt beneficiaries, inheritance tax may then become payable as part of her estate.

So why is the exemption so valuable?

Because the difference between paying inheritance tax today and potentially paying it many years later is enormous.

The real value is time and flexibility

Avoiding an immediate inheritance tax charge can give the surviving spouse something exceptionally valuable: time to undertake further estate planning.

Depending upon the circumstances, the surviving spouse may subsequently be able to:

- make outright lifetime gifts;

- take advantage of potentially exempt transfers and the seven-year rule;

- make gifts falling within the annual and other statutory exemptions;

- make qualifying regular gifts out of surplus income;

- undertake appropriate trust or succession planning;

- restructure business and investment assets;

- spend or otherwise reduce the estate during their lifetime; and

- make charitable gifts or charitable legacies.

The estate eventually exposed to inheritance tax on the second death may therefore bear little resemblance to the estate inherited on the first death.

Marriage does not merely postpone a tax bill. Properly combined with long-term succession planning, it can fundamentally alter the family’s eventual inheritance tax exposure.

The transferable nil-rate band

Marriage and civil partnership provide another important advantage.

Where the first spouse or civil partner dies without using all of their inheritance tax nil-rate band, the unused percentage can generally be transferred to the survivor’s estate.

With the ordinary nil-rate band presently standing at £325,000, this can potentially provide the survivor’s estate with an ordinary combined nil-rate band of up to:

£650,000

There is also a separate residence nil-rate band regime where a qualifying residence passes to direct descendants.

However, that relief is subject to its own conditions and, importantly for very substantial estates, begins to taper once the estate exceeds £2 million. It should therefore not simply be added to the allowances when analysing very high-value estates.

Marriage is the starting point, not the entire estate plan

For an estate approaching £142 million, the nil-rate band is comparatively insignificant.

The more substantial planning opportunities are likely to concern the ownership, character and eventual destination of the underlying assets.

Depending upon individual circumstances, these may include lifetime gifting, trusts, business succession planning, qualifying Business Relief, charitable giving and carefully structured wills.

Each requires its own analysis.

For example, a lifetime gift to an individual may constitute a potentially exempt transfer. Broadly, if the donor survives seven years after making the gift, it can fall outside the donor’s estate for inheritance tax purposes, although the rules concerning gifts with reservation of benefit and other anti-avoidance provisions must always be considered.

Trust planning can also be valuable, but placing assets into trust is not automatically tax-free. Certain transfers into trust can themselves constitute immediately chargeable lifetime transfers and relevant property trusts may subsequently face periodic and exit charges.

Similarly, Business Relief can substantially reduce the inheritance tax attributable to qualifying business interests, but eligibility depends upon the nature of the business and the applicable legislation at the relevant time. It should never be assumed merely because an individual owns shares in a company.

Charity can materially alter the calculation

Charitable giving occupies a particularly favourable position within the inheritance tax regime.

Qualifying gifts to charity are generally exempt from inheritance tax.

In addition, where the statutory conditions are satisfied and at least 10% of the relevant net estate is left to charity, the inheritance tax rate applying to the relevant taxable component of the estate can be reduced from the ordinary 40% to 36%.

For substantial estates, charitable legacy planning can therefore serve two objectives simultaneously: supporting causes important to the individual while reducing the inheritance tax rate applying to the balance of the taxable estate.

The wider lesson for unmarried couples

The Ricky Gervais example attracts attention because the numbers are enormous.

The underlying principle, however, applies just as readily to an unmarried couple owning a £1 million house, an investment portfolio, a family business or other substantial assets.

Many long-term couples assume that because they have lived together for decades, own property jointly and regard themselves economically as one household, the tax system will treat them as though they were married.

It does not.

The distinction between £1 million passing to a spouse and £1 million passing to an unmarried partner can be substantial.

There are also wider succession issues to consider. The legal consequences of death can depend upon how property is owned, whether there is a valid will, the beneficiary designations applicable to particular assets and, increasingly, the treatment of pensions and other investment structures.

Estate planning should therefore examine the couple’s affairs as a whole rather than inheritance tax in isolation.

A registry office can sometimes be remarkably effective tax planning

Marriage should obviously never be reduced purely to a tax transaction.

But from a private-client perspective, the tax consequences of marriage or civil partnership can be profound.

For couples who already regard themselves as permanent life partners, formalising that relationship can unlock statutory inheritance tax treatment that decades of cohabitation alone cannot provide.

In the right circumstances, a relatively straightforward legal step can prevent an immediate inheritance tax charge running into hundreds of thousands — or, in exceptional cases, tens of millions — of pounds.

Ricky Gervais may have spent decades questioning what difference a marriage certificate makes.

UK inheritance tax law provides a rather expensive answer.

Estate planning: questions worth asking now

Anyone with substantial property, investments, business interests or international assets should consider:

What would happen if I died tomorrow? Who legally inherits my assets? What inheritance tax would arise? Does my spouse or partner receive the treatment I assume they receive? And what could legitimately be done now, while there is still sufficient time for the planning to work?

Those questions become particularly important for unmarried couples, business owners, internationally mobile families and individuals with estates spanning several jurisdictions.

Early planning generally creates considerably more options than planning undertaken after a death.

This article is provided for general information only and does not constitute legal or tax advice. Inheritance tax treatment depends upon individual circumstances, including residence status, asset ownership, lifetime transfers and the legislation in force at the relevant time. Specialist advice should be obtained before implementing any estate-planning arrangement.

Ricky Gervais, Marriage and the £56 Million Inheritance Tax Question, by Atef Elmarakby