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Note: This content should not be taken as financial advice. It is for information and inspiration purposes only. To receive regulated, personalised financial advice into your own situation and goal, please consult an independent financial adviser such as one of our here at Suttons IFA in Sale, Cheshire.

Perhaps the biggest cause of financial tragedy can be summarised in one word: Assumption.

Unfortunately, many cohabiting and unmarried/non-civil partnered couples are operating on the assumption that they will, one day, automatically inherit their partner’s assets, money and pension if they pass away before they do. This is not the case.

In fact, to ensure that you receive your partner’s estate, this person will need an iron-clad Will specifying you are the main (or sole) beneficiary. However, only about one-quarter of cohabiting couples have a Will (compared to over half of married couples).

However, even many of those aware of the need for a Will between cohabiting couples misunderstand have inheritance tax comes into play, regarding their situation. For married couples, for instance, if the husband/spouse dies, then the surviving spouse usually receives the deceased person’s estate completely free of inheritance tax (IHT). For cohabiting partners, however, this is not the case. You are likely liable to pay IHT even if you have lived together for many decades, and even if you have children together.

At Suttons IFA, we believe it’s important to raise awareness of these issues to ensure cohabiting people are better prepared. After all, this demographic currently comprises nearly 3.5m Britons and is the UK’s fastest-growing type of family.


Inheritance Tax

In 2019-20, the rate of inheritance tax is 40% levied on the value of your estate over £325,000 (i.e. the nil rate band). So, if your assets are valued at a total of £800,000, then you might face a £190,000 inheritance tax bill when you die (£800,000 – £325,000 x 0.4).

There are ways to reduce your IHT liability. For instance, a few years ago the government introduced an “additional nil rate band” rule, which in 2019-20 allows you to pass on an extra £150,000 to your direct descendants if you give them your residential property.

However, it is the laws concerning married couples which are particularly pertinent to cohabiting couples. If you are married, then both you and your spouse each possess an individual nil rate band and additional nil rate band.

Effectively, that means that a married couple can combine their allowances, which enables them to pass on more to their children, free of inheritance tax (IHT):

Spouse A: £325,000 NRB + £150,000 ANRB
Spouse B: £325,000 NRB + £150,000 ANRB
Total IHT-free allowance: £950,000

Yes, that’s right. Married couples have the potential to pass on nearly £1m to their children or direct descendants, free of IHT. Cohabiting couples, however, do not have this ability.


Should We Tie The Knot?

This imbalance in the UK’s inheritance tax system leads many cohabiting couples to ask themselves: “Should we get married, then?” It’s a fair question to ask, and of course, this is a very personal decision which only you can make.

There are other ways to mitigate your IHT liability as a cohabiting couple if you decide that getting married is not for you. Although you will admittedly not have the same financial benefits as a married couple, you can explore other tactics, such as making annual “exempted” gifts to your partner worth up to £3,000.

Gifts to your unmarried partner which exceed this amount (e.g. property, expensive jewelry etc.) will likely face the 40% IHT rate if you die within 3 years of making the gift to your partner. If you die between 3-7 years of the gift, then a “taper relief” is applied. With gift-making, however, it is important to seek independent financial advice as this can sometimes have an adverse IHT and CGT effect.

It’s worth noting that pensions are usually excluded from inheritance tax. If you are under the age of 75 when you die, and you name your unmarried partner is named in your Will as the beneficiary, then they should not have to pay any tax on the pension. If you are over 75 when you die, however, then they will likely need to pay Income Tax on any amount they withdraw from the pension.

Another option for unmarried couples to consider is life insurance, which can sometimes be used to cover an IHT bill later down the line. Again, here it is best to seek the counsel of an independent financial adviser (IFA) to ensure that you find a good deal for your situation and that the policy is written into an appropriate trust so that it isn’t counted as part of your estate for IHT purposes.


Final Thoughts

Hopefully, this article has shed more light on your own rights and situation as a cohabiting couple (if that is the nature of your relationship). Our intention here isn’t to convince you to get married, but rather to help inform your own thinking.

At the very least, it is a good idea to consider drawing up a legally-airtight Will if you or your partner have not already done so. Whilst this does not eliminate IHT liability, it does help ensure that your assets go to your partner in the tragic event you die prematurely.

We also recommend speaking to a qualified financial adviser, such as a member of our team here in Sale at Suttons IFA, to discuss your options. This can be very helpful in ensuring you have all the information you need to make an informed decision on this matter. Remember, your initial consultation is completely free and without further obligation.

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