Inheritance / Gift Tax and unmarried couples

An unjust situation has arisen in respect of gift and inheritance tax where unmarried couples are living together and either one of the parties owns the house and gifts half of the house to the other party or, where the house is owned jointly, one of the parties dies and that person’s share of the house passes to the other party either by will or otherwise. In either of these circumstances a substantial gift or inheritance tax liability can arise for the benefiting party.

This liability arises because, although the parties are a couple, at law they are deemed to be strangers and as a consequence for gift/inheritance tax they have low tax thresholds as against each other. This means that in the event of either party getting a gift from the other or in the event of one party dying and the other party obtaining an inheritance on the death, a substantial tax liability will arise which, if the gift or inheritance is the parties’ residence, may lead to the sale of the house in order to pay the tax. The injustice of this situation is highlighted by the fact that there is no gift/inheritance tax in respect of gifts or inheritances between people who are married.

Section 151 of the Finance Act 2000 remedies this situation by giving an exemption from gift/inheritance tax for unmarried couples in respect of their main residence. This exemption is subject to the following conditions:

The beneficiary of the gift or inheritance must have been living in the house as his or her main residence for a period of three years prior to the date of the gift or inheritance or if the house has replaced another house within the 3 year period, the occupation of the two houses must have been for 3 of the previous 4 years prior to the date of the gift/inheritance.

At the date of the gift/inheritance the beneficiary of the gift/inheritance must not own or have an interest in any other house.

The beneficiary must continue to reside in the house for a period of 6 years after the date of the gift/inheritance or if the beneficiary replaces the house with another house he or she must reside in the original house and the replacement house for a period of 6 of the 7 years following the date of the gift/inheritance.  

This 6 year condition is itself qualified as follows:

The condition does not apply if the beneficiary of the gift/inheritance is at least 55 years at the date of the gift.

If the beneficiary of the gift/inheritance has to work abroad during the 6 year period after the gift/inheritance, this absence from the house does not cause the beneficiary to lose the relief. The relief will also not be lost if the beneficiary’s employer requires him or her to live elsewhere during the 6 year period.

The relief will not be lost if the house has to be sold within the 6 year period where the beneficiary has to sell the house because he or she requires long term nursing care in a hospital, nursing home or convalescent home.

In summary, where an unmarried couple are living together and one of the parties gives half of the house to the other or where the couple own the house and one of the parties dies leaving the whole house to the other party no gift/inheritance tax liability will arise for the beneficiary as long as the conditions as set out above are observed.