Unmarried or not of United KIngdom Domicle
If an unmarried couple hold a property (including the family home) jointly, regardless of whether held on a 'joint tenancy' or 'tenants in common' basis, in the event of the death of one partner, their 'share' of the property will be assessed as part of their estate by the Inland Revenue.
This means that Inheritance Tax (IHT) may become due if their estate, including the value of their 'share' of the home, together with all and any other assets making up the total value of their estate, exceeds the nil-rate band at the time of death.
Because of this, it is vital that any mortgage-related life insurance is carefully arranged so that the proceeds in the event of death are paid out quickly and without forming part of the estate of the deceased person.
Joint Tenancy:
If the property is held on a "joint tenancy" basis, the HM Revenue & Customs (HMRC) deems the ownership split to be 50/50, which means that 50% of the total value of the property (less any outstanding mortgage) is deemed to form part of the estate of the deceased and therefore potentially liable to IHT.
If the property is worth (say) £500,000 with an outstanding mortgage of (say) £100,000 the 'equity' in the property will be £400,000. In the event of death, 50% of this amount, i.e. £200,000 would be deemed by HMRC to form part of the estate of the deceased.
If the deceased person had no other assets, their £200,000 'share' of the equity in the property would be below the nil-rate band and no IHT would be payable.
However, if they had other assets (including, for example, life insurance, if it is not in trust) that - when added to the £200,000 equity share - took them above the nil-rate band, then IHT would be payable on the whole of the excess, without upper limit, at a rate of 40%.
Tenants in Common:
If the property is held on a "tenants in common" basis, the split will be the actual split defined in the “tenants in common” agreement, which may be different to 50/50. In this case, it will be the actual percentage split of the property (less any outstanding mortgage) that will be potentially liable to IHT.
If the property is held on a "joint tenancy" basis, the Revenue deems the ownership split to be 50/50, which means that 50% of the total value of the property (less any outstanding mortgage) is deemed to form part of the estate of the deceased and therefore potentially liable to IHT.
Such a couple could either get married, (as soon as they are married, the “spouse exemption” under the Inheritance Tax Act 1984 (IHTA 1984) would mean that any transfers (including of shares of property) to a UK domiciled spouse (interestingly, the domicile of the deceased spouse is irrelevant, the important point is that the surviving spouse be of UK domicile) would be free of any IHT.
If they do not wish to get married an alternative solution would be to take out life insurance in trust for the amount of the anticipated IHT liability.
Unmarried
For a legally-married couple, (or nowadays also 'Civil Partners') the 'spouse exemption' contained in the Inheritance Tax Act 1984 means that an unlimited amount can pass, totally free of any liability Inheritance Tax to the surviving spouse from the deceased spouse.
If the couple are not married, this 'spouse exemption' does not apply. Only the nil-rate band would be available. Any value above this would be liable to Inheritance Tax.
Surviving spouse not of United Kingdom Domicile
If a UK domiciled spouse dies and leaves his or her estate (including the value of the home) to a non-UK domiciled spouse, the nil-rate band would be available, plus an amount of £55,000. This would make a total of £367,000. Anything above this would be liable to Inheritance Tax at 40%.
