The number of people getting married is at the lowest rate on record, according to the Office of National Statistics. In this climate, it’s worth remembering that unmarried couples do not have the same legal rights as those who are married or in a civil partnership when it comes to inheritance and the implications of IHT, capital gains tax, income tax and pensions. This is the case even if you have lived together for a significant amount of time and have children.
If you choose to live as unmarried partners, it is important that you take steps to ensure you have the right legal, tax and financial provisions in place to protect you in the case of various life events.
In this article, we aim to provide guidance on how the law treats unmarried partners to help you make informed decisions about your estate and financial planning.
Intestacy rules and inheritance tax for unmarried couples
If you die without leaving a valid will, the distribution of your estate is determined in accordance with the intestacy rules. Under these rules, if you and your partner were unmarried, there is no automatic right to inherit from each other, regardless of the duration of your relationship.
In these circumstances, your estate will pass to blood relatives in order of priority, starting with any children you may have, parents, siblings, half siblings, grandparents and so on.
In contrast, married couples enjoy certain protections and entitlements and the surviving spouse will inherit all personal belongings, the first £270,000 of the estate (£322,000 from 26th July 2023) and half of the remaining estate (where the deceased has left children). If the deceased died without leaving children, then the surviving spouse will receive the entire estate.
Transfers of assets between married partners are generally exempt from inheritance tax, meaning that when assets pass to the surviving spouse, no IHT is usually payable on that transfer. Additionally, any unused inheritance tax free allowance (known as the nil-rate band) of the first spouse can be transferred to the surviving spouse potentially increasing their inheritance tax free allowance on second death.
Transfers of assets between unmarried partners are not exempt from inheritance tax and assets above the value of the nil-rate-band (currently £325,000) are subject to inheritance tax at a rate of 40%. This includes when unmarried couples own property together as joint tenants. The survivor may have the right to inherit the property but there could be tax due on the estate which, if the surviving spouse is not able to pay, may result in them being forced to sell the property.
Understanding the differences in treatment under the intestacy rules and the implications for inheritance tax highlights the importance of estate planning for both unmarried and married partners. By creating a valid will, you can ensure that your assets are distributed according to your wishes, regardless of your marital status.
A well-drafted will allows you to designate beneficiaries outside the confines of the intestacy rules, providing peace of mind and avoiding potential disputes among family members. With proper planning, you can also take advantage of various tax planning strategies to minimise the impact of inheritance tax on your estate.
Income tax and capital gains tax
The marriage/civil partners’ transferable allowance permits couples to transfer £1,260 of their personal income tax allowance to their spouse. To benefit as a couple, the lower earner must have an income below the personal allowance which is currently £12,570. This works out at around a £250 tax saving per tax year, which may not seem a lot but could be a good saving in the long run. Unmarried couples are not entitled to combine their personal tax allowance, regardless of how long they have been together.
Unmarried couples are also required to pay capital gains tax if they wish to transfer assets between them such as property or a general investment account. However, it’s worth noting that an unmarried couple who each own a home can both take advantage of the principal property relief for tax purposes. Principal property relief, sometimes referred to as private residence relief, applies to the sale of an individual’s only or principal residence.
To be entitled to this relief, the following must apply:
- You are selling your only home
- You have lived in the property as your main home for the entire time you have owned it
- You have not used part of your home for business purposes
- The property has a total size of less than 5,000 square metres (including grounds)
- The intention of the purchase wasn’t solely to make a gain
Both members of the unmarried couple can benefit from this relief if they each individually own property. A married couple are deemed as living together and only benefit from one principal property relief.
Pensions and life insurance policies for unmarried couples
Unmarried couples do not have an automatic right to benefit from their partner’s pension or life insurance policies unless they are named formally as a ‘nominated beneficiary’.
Furthermore, the definitions of spouse or qualifying dependant in defined benefit pensions can vary and may not necessarily include a co-habiting partner.
If you choose to be an unmarried couple, it’s crucial to review your pensions and life insurance policies if you wish for your partner to receive this money after you pass away. Robust planning and open conversations with your partner are key to ensuring you are both protected in each other’s plans, if that is what you want.
In summary
Whether you are married or unmarried, understanding how the law treats partners is crucial. While married partners have certain legal protections and tax advantages, unmarried partners face additional challenges and will need to take proactive steps to safeguard their assets and loved ones.
If you would like to discuss financial planning as a couple, please get in touch.
[1] UK Statutory Instruments N.758, The Administration of Estates Act 1925 (Fixed Net Sum) Order 2023, Legislation.gov.uk
[2] Spring Budget Report 2023, What it means for you, Progeny
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