I have unmarried clients who have previously made mirror Wills leaving everything to one another and thereafter to their two adult children. They have two main assets; the house that they own outright as beneficial joint tenants and a joint bank account. The house is valued at £600,000 and the bank account contains £300,000.
On 1st death will HMRC ignore both assets for IHT purposes (deemed to have been passed by survivorship) leaving the estate on 2nd death paying IHT of £160,000 (£900,000 - £325,00-£175.000 = £400,000)
No, if they are unmarried HMRC will not ignore the joint assets that have devolved by survivorship. IHT relief only applies to surviving spouses or civil partners. An IHT account will be due on the first and second deaths and IHT will be due on the excess over £325k.
Thank you for your clarification on this topic. Much appreciated
They could consider severing the joint ownership in their home and bequeathing a 1/2 share to their children. That would provide a further £ 175,000 (RNRB) of exemption, so that on first death, there would be no liability (£300000 +£150000) - (£325000 +£175000) and on second death assuming the figures remained the same, there would also be no liability. Indeed, on second death, the value of the survivors half share of the home should qualify for a discount for joint ownership with the children. Obviously, the survivor may feel less secure only owning only a half share and there are the usual risks of the children becoming bankrupt/divorced.
If the parties do not wish to disturb the equitable joint ownership during their joint lifetimes after the death of the first a variation could be made to insert a Nil Rate Band discretionary trust, or just a NRB legacy to the survivor, and sever the joint ownership of jointly owned assets, just for tax purposes as the right of survivorship would operate in the real world.
In theory such a provision could be inserted into each Will while both are alive. Although a joint tenancy cannot be severed by Will they could each create a written notice of severance ready to sign unilaterally if circumstances permitted, thus not requiring a new Will or codicil with execution formalities. A notice may be served on a co-owner who has lost capacity and by the LPA attorney or a deputy of the latter. I have never seen this in practice but I have seen many arrangements in the case of spouses e.g cross options to ensure so far as possible that the first to die acquires (no CGT for spouses) chargeable assets from the other to maximise the CGT-free uplift on death if there is time e.g. a terminal diagnosis.
While it is generally imprudent to rely on a future variation rather than making or changing a Will it might not be unreasonable to do so here. A necessary precaution would be to ensure that the current Wills do not contain an intrinsic impediment. As the Wills are in mirror form it seems likely that at least their respective provisions as to beneficial interests, principally in residue, will be identical. The question is: who would take under the Will of the first to die even if their estate is very small or insignificant. The usual problem is minors or unborns either as direct beneficiaries or within a will trust. Even then adult beneficiaries can vary their own shares only and will trustees can be given power to accept alternative provision e.g. a fixed share of the NRB sum as opposed to a share of residue worth much less in the absence of a variation.
Or they could just get married!
Unfortunately, that’s not correct. A half share of the joint assets is deemed to pass on the 1st death by HMRC. You may get a discount on the valuation of the property for the joint ownership (probably 15%) but that still gives a taxable estate of £405,000 and a tax bill of £32,000. There will be no RNRB available on the 1st death.
The right of survivorship per se does not give an exemption for inheritance tax purposes. In consequence, in the case of your unmarried clients, on the first death the share of the deceased individual in the jointly held assets will be relevant for inheritance tax purposes.
Any recommendations as to whom each should marry?
Even if the Government of the day has an explicit policy to encourage marriage/civil partnership, and whatever one’s personal views, when at least half of families with children in the UK are not married, is it right that the IHT reliefs for spouses exclude long-term cohabitants? Or even others sharing a residence, such as siblings, at least as to such residence and if only deferring the charge. Government is quick to include cohabitants in measures to limit tax reliefs and social security benefits if they deliliberately cohabit out of choice to escape those measures as they affect married couples.
Maybe each other??
Unfortunately, Holland v IRC  and Burden v UK  still stand.
Slightly off topic, but you might want to remind them that the FSCS only covers £85k compensation and they should look at spreading their £300k between accounts with different organisations. Just to protect themselves against the unlikely (but still possible) event of a bank’s failure. They need to take care as an organisation may have multiple brands but the £85k is per organisation.
Sorry for not actually answering your question!