Think you’re safe cohabiting? Figen Demiri, Senior Associate at Stowe Family Law, talks the consequences you could soon be facing.
For many, marriage is no longer viewed as an essential life milestone. Increasingly people are choosing to simply cohabit, without feeling the need to formalise their relationship legally. And while society may have moved on from the idea that marriage is an expected milestone, the tax system in the UK has not. That distinction could have serious repercussions come April 2027, when new inheritance tax rules will come into force.
Setting the Facts Straight Surrounding the ‘Common Law Marriage’ Myth
“One of the biggest misconceptions we encounter as family lawyers is the belief that a common law partner exists,” explains Figen. “In England and Wales, that is not considered a legal status. You can live together for 30 years, share finances, raise children together and own property jointly, but if you are not married or in a civil partnership the law does not treat you as spouses when one of you dies. This distinction matters when it comes to inheritance tax. Married couples and civil partners can usually transfer assets to one another free of inheritance tax on death. They can also transfer unused inheritance tax allowances between them. In comparison, unmarried couples cannot.”
Unused Pensions to Fall Within the Scope of Inheritance Tax
“The government has confirmed that most unused pension funds and death benefits will be brought within the scope of inheritance tax. This means pensions which were previously often passed on free from inheritance tax, may now form part of a person’s taxable estate when they die. For married couples and civil partners, there is still a significant level of protection available; assets passed between spouses on death are generally exempt from inheritance tax. However, unmarried couples do not benefit from the same automatic exemption. For cohabiting couples, particularly those later in life or entering second relationships, the changes could create a serious financial vulnerability.”
The Most Efficient Ways to Pass on Wealth
“Historically pensions have been one of the most tax efficient ways to pass on wealth. Many people deliberately preserve pension savings and instead draw income from other assets knowing unused pension funds could often be inherited outside their estate for inheritance tax purposes. From 6 April 2027, most unused pension funds and pension death benefits will count towards the value of an estate for inheritance tax purposes. Given the rise in property values and growing pension pots this is no longer an issue affecting only the ultra-wealthy. Many ordinary families may find themselves caught within the inheritance tax net. In particular, if one cohabiting partner dies with substantial assets, including an unused pension, the surviving partner could face a sizeable inheritance tax liability that a spouse otherwise would not.”
Who Will These Changes Most Affect?
“These changes are likely to hit a growing demographic: older cohabiting couples. Many people entering relationships later in life actively choose not to re-marry. Often this is entirely understandable as they may wish to preserve assets for children from the previous marriage or avoid the financial complications of a re-marriage.”
How to Improve Your Financial Security as an Unmarried Couple
“Careful estate planning can make a significant difference. Many unmarried couples mistakenly assume their partner will automatically inherit if they die. Without a valid will this may not happen. Under the intestacy rules in England and Wales unmarried partners have no automatic right to inherit regardless of the length of the relationship, meaning a professionally drafted will is crucial. In some circumstances trusts or life insurance policies written into trust can help provide for a surviving partner or children while mitigating inheritance tax exposure. However, these arrangements are highly facts-specific and require specialist legal and financial advice.”
Aligning Modern Relationships with Legal Protection
“The forthcoming inheritance tax changes are a reminder that modern relationships and the reality of family ties do not always align with expected legal protection. If you are a cohabiting couple, and particularly somebody in your later life or in a second relationship, now is the time to review your Will or create one, with careful consideration of who the beneficiary to your pensions and capital will be.”
