The unexpected and expensive tax pitfalls of cohabiting

When cohabiting, the assumption is often that your partner will automatically inherit your estate – your shared home and your assets – without any Inheritance Tax implications. This is the case for married couples and those in civil partnerships, after all. Sadly, this is simply not true, even if you have been living together for years, decades even. There is no such thing as a common law marriage in the eyes of the tax man.

The reality is that if your partner dies, you will have to pay the Inheritance Tax on everything your partner owns over the £325,000 allowance BEFORE their estate can be passed onto you, which could include your home, even if it is jointly owned and any savings and investments they may have.

It pays to tie the knot

There are lots of reasons why people decide to get married, tax, however, is not usually one that immediately springs to mind. But it is, in fact, a very strong reason to get married.

If you are co-habiting with your partner, getting married is absolutely the sensible thing to do from a tax perspective – something SK paraplanner, Richard Simmonds, and his partner recently decided to do. 

According to a House of Commons research briefing published in November last year, there are approximately 3.6 million couples in the UK in 2021 who were co-habiting, rather than being married or in a civil partnership.

Assuming a fair proportion of co-habiting couples own the home that they live in, it is likely that in many parts of the UK they will own assets of more than £325,000 each. If one partner dies unexpectedly, anything that person owns above £325,000, with the exception of pensions and certain assets held in trust for at least seven years, will be subject to Inheritance Tax at the rate of 40%. If the couple have children, a further £175,000 allowance might be applied.

The real cost of cohabiting

What this means is that the surviving partner somehow has to pick up the tax tab, and the tax has to be paid before the deceased’s estate can pass to the surviving partner. If you share a house equally with an unmarried partner worth £1 million and you don’t have kids, the surviving partner will have to find at least £70,000 in Inheritance Tax. And that’s just on the value of the house. Savings accounts, ISAs and valuables such as jewellery all have to be added to the estate. Where would this money come from? Remember you wouldn’t be able to access your partner’s assets or accounts, so would you be able to pay this from your own personal wealth?

The damage could be reduced somewhat by writing an expensive, very in-depth will. Or, you could, as Richard very sensibly did, visit your local registry office, get married or partnered up, and with a stroke of a pen resolve the problem.  It may not sound like the most romantic gesture, but it could save you and your partner a lot of heartache in the future.