For richer, for poorer… and for Inheritance Tax (IHT)?

For many long-term couples, deciding whether to marry or enter a civil partnership is a deeply personal choice. However, while couples may feel there is little difference between living together and being married, the legal and tax implications can be significant.

One area where this distinction is particularly important is Inheritance Tax (IHT) and estate planning. Unmarried couples do not benefit from the same tax allowances and exemptions available to spouses and civil partners, which can have substantial consequences when passing assets between partners.

Understanding these differences is an important part of effective estate planning and can help couples make informed decisions about their financial future.

The myth of the “common-law spouse”

One of the most persistent misconceptions is that couples acquire similar rights to married couples simply by living together for long enough.

They don’t.

Under the current rules in England and Wales, an unmarried partner does not automatically inherit under the intestacy rules, regardless of how long a couple has lived together. Marriage and civil partnership also bring significant Inheritance Tax advantages that cohabitation does not.

This can become particularly important later in life, when couples may have accumulated property, pensions, investments and other assets over several decades.

Why marriage can make such a difference for IHT

Assets passing between spouses and civil partners will generally benefit from the spouse exemption from Inheritance Tax.

There can also be the ability to transfer unused Inheritance Tax allowances between spouses on death.

For an unmarried couple, the position is very different. Assets left from one partner to another can potentially be subject to Inheritance Tax in the same way as assets left to another beneficiary.

For some couples, particularly those with substantial estates, the difference can be significant.

Paul and Helen are unmarried; in the below tables you see their individual IHT liabilities should either of them pass away. They have no children and both are sole beneficiaries. You can see that IHT is payable on 1^st death for either of them which increases specifically for Paul after April 2027. 

Of course, if they were married or in a civil partnership, there would likely be no IHT on first death, saving up to £404k in IHT. The key point being is that in this instance, the survivor would need to source the funds to pay the IHT which could impact standard of living and potentially force them to sell the home or take other measures.

Please note: This is an illustrative example, outcomes will vary depending on individual circumstances.

But isn’t the law changing for cohabiting couples?

The Government is currently considering reforms designed to strengthen the rights of cohabiting couples.

Among the proposals are potential changes to intestacy rules so that qualifying cohabitants could automatically inherit in certain circumstances.

That could represent an important change in how unmarried couples are treated.

However, inheritance rights and Inheritance Tax are two separate questions. Even if greater rights are ultimately introduced for cohabiting couples, this should not be confused with the inheritance tax exemptions currently available to spouses and civil partners.

At the time of writing, no changes have been implemented. Any future reforms remain subject to Government consultation and legislation.

Marriage isn’t an Inheritance Tax strategy

There is an obvious danger in reducing something as personal as marriage to a tax-planning exercise.

Marriage or civil partnership creates wider legal and financial consequences and should never be entered into simply because a spreadsheet says it saves tax.

But equally, couples who consciously decide not to marry should understand the financial consequences of that decision.

That might mean reviewing wills, ownership of property, pension nominations, life assurance and wider estate planning.

The planning conversation

The lesson perhaps isn’t that long-term couples should rush down the aisle. It’s that after building a life together for 10, 20 or even 40 years, it is worth making sure the legal and financial arrangements supporting that life actually reflect what you would want to happen when one of you dies.

Because when it comes to Inheritance Tax, unfortunately, there is no such thing as a common-law spouse.

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