The two women in question are sisters who unsuccessfully appealed to the European Court to have the same tax rights as married couples and registered civil partners.
The two sisters have lived together all their lives but as they get older (one is 90 and the other 82), they became concerned that when the first of them died, the surviving sibling would have to pay a substantial IHT bill.
If they had been successful, the Misses Burden would have been entitled to transfer assets to one another free of IHT. In addition, under the current rules, the first of them to die would also have been entitled to transfer any unused tax-free IHT nil-rate band to the survivor.
Instead, on each of their deaths, their assets, including the value of their interest in the home they share, will be liable to IHT. They could also, of course, have IHT liabilities on any gifts made in the seven years before their death.
This highlights the need for unmarried people, whether family members or not, to think about IHT mitigation – particularly where sharing houses worth more than double the IHT nil-rate band of 624,000.
The first thing that anyone thinking about IHT planning should do is to make a will and this is particularly important for unmarried people living with a non-family member. This is because, depending on how the ownership of the house is structured, the rules of intestacy might mean that the interest in the house does not even pass to the surviving owner on first death.
Wills can also determine where the burden of tax falls. For example, an interest in a house could be passed to a co-habitee free of tax, with the effect that the tax burden falls on the liquid part of the estate – a useful tactic where different people are inheriting the house and the liquid assets.
People with particularly illiquid estates who are still in reasonable health might also want to consider life insurance.
Depending on the circumstances, the appropriate policies might be own-life policies in trust, life of another policies or even joint-life, first-death policies.
Whatever the option chosen, the aim will be to ensure that the IHT bill is covered so the question of having to sell the house to pay tax does not arise.
Tax can still be an issue where the interest in the house is worth less than the IHT nil-rate band of 312,000 if the overall estate generates an IHT liability. Planning tactics with liquid assets that can reduce the overall bill should also be considered.
Lifetime gifting springs to mind. The need for income may be a barrier to this, although use of arrangements such as discounted gift trusts and use of sheltering techniques like using Aim-listed portfolios to take advantage of business property relief, can help reduce the IHT liability while allowing the individual some access to their investments.
Human nature is such that people will not always plan to mitigate their IHT liability. Where the interest in the house passes to the survivor with an associated IHT liability, the survivor will need to think about the best way to pay the tax.
It is worth bearing in mind that IHT on houses can be paid by the instalment option which means the tax can be paid over 10 years.
This may seem generous but the problem with using this option is that interest is payable as well as the tax, so the cost of borrowing from the Treasury will have to be weighed up against other methods of funding.
Finally, the survivor inheriting half of a valuable property could consider options such as a mortgage or equity-release contract to fund the tax.
These might be considered extreme options to be used only where funds are not available and where remaining in the house itself is the main priority.
Property prices may have been cooling but in May the average cost of a detached house in Greater London was reckoned to be 754,486. Property values look certain to remain a major contributor to the need to undertake IHT planning.
The ability to transfer unused nil-rate bands to surviving spouses introduced in the 2007 pre-Budget report is hugely helpful to married couples. However, whereas a few years ago, a focus of IHT planning was how to use up the nil-rate band of the first spouse to die, the new emphasis should be on helping people who are cohabiting and unable to take advantage of the transferable nil-rate band.