Rising Inheritance Tax receipts and falling marriage rate highlight an issue for cohabiting couples

Marriage rates have fallen to their lowest on record, according to the latest figures from the Office for National Statistics. There were 85,770 marriages in total in England and Wales in 2020, a decrease of 61.0% from 219,850 in 2019; the lowest number of marriages on record since 1838.

At the same time, the net for Inheritance Tax (IHT) is creeping ever wider. HMRC received £7.1 billion in IHT for 2022/2023 and The Office for Budgetary Responsibility predicts that inheritance tax receipts for 2023/2024 will be £7.2 billion.

This could present an issue for cohabiting couples, who are unable to take advantage of spousal exemptions when it comes to IHT.

How does being unmarried impact IHT?

Currently, IHT is paid at 40% on the value of an estate over the Nil Rate Band (NRB), which since 2009 has been set at £325,000 for an individual and £650,000 for a couple (the allowance can effectively be ‘rolled over’ upon the first death). There is also a Residence Nil-Rate Band (RNRB), which means if you are leaving your main home to children or grandchildren and your estate is worth under £2 million, you (and your spouse) can benefit from an additional £175,000 allowance each. As such, for couples who are married or in a civil partnership, up to £1 million of their estate is exempt from IHT.

However, these exemptions do not apply to couples who are not married or in a civil partnership. In those circumstances, the estate of the partner who dies first will be taxable if it exceeds £325,000, even if it passes to the surviving partner. Once the surviving partner has inherited, the survivor’s estate would then again be subject to IHT (apart from the first £325,000) in which case there is usually an element of double taxation (tax on first death and tax on second death as well).

This is, of course, providing that the individuals involved have made a will. Contrary to popular opinion, there is no such thing as a ‘common law’ spouse, and if your partner dies without a will and you are not married or in a civil partnership, then their estate will pass on under strict intestacy rules.

Under these rules, the surviving partner would have no rights to inherit and may have to think about bringing some kind of challenge against the estate.

An unmarried cohabitant would have the right to bring a claim against the estate of their deceased partner if they had been living together for at least two years as at the date of death, but whether that claim would be successful would depend on a number of wider circumstances including the value of the estate, the length of the relationship and so on.

What should cohabiting couples think about when it comes to estate planning?

We would always advise everyone, whether they are married or not, to make a will. It is also worth noting that if you get married to or enter into a civil partnership with your partner after making your will, you should check that the will you made is still valid, as unless it contains a specific clause, it will likely be made null and void by your marriage or civil partnership.

For those couples who do not ever wish to get married or form a civil partnership, having a will is particularly important as it means that you can pass your assets on to your partner, rather than risk them receiving nothing under intestacy rules. It is also worth ensuring that you nominate your partner as the beneficiary of any pension scheme, death in service benefit or life insurance policy.

We would also recommend that everyone puts Lasting Powers of Attorney (LPAs) in place. An LPA is a legal document in which you appoint one or more people (the attorneys) to act on your behalf, in circumstances where you no longer have capacity to make decisions yourself. There are two types, one for finances and one for health and welfare.

While hopefully you will not need to use them, having LPAs in place can avoid the expense and the potential difficulties of a Court of Protection Deputyship application if you later need someone to act on your behalf.

How can unmarried couples mitigate exposure to IHT?

In terms of IHT, one way to mitigate this for unmarried couples is to have wills prepared by which they leave everything into discretionary trust rather than to each other. This will not do anything to mitigate the tax on first death but it will at least ensure that the estate of the person who dies first passes into trust and is therefore outside the inheritance tax calculation when the survivor dies.

The wider issue is whether the couple then want to have some kind of pre-nuptial or cohabitation agreement in place which might help to regulate the position as well.

Our Wills, Estate & Tax Planning and Family teams have a huge amount of experience in advising cohabiting couples, so please do get in touch if you have any questions about the legal position for those living together but not married.