How cohabiting couples can limit potential financial disadvantages

  • Learn about how cohabiting couples can limit potential financial disadvantages
  • Find out the disadvantages cohabiting couples suffer when a relationship breaks down
  • Find out the disadvantages cohabiting couples suffer when a partner dies

The disadvantage that cohabitants and their children face when it comes to inheritance tax (IHT) is perhaps even more egregious. No IHT is levied following the death of a married or civil-partnered person, if the estate is passed to his or her spouse.

The beneficiary will then inherit their partner’s unused IHT allowance, enabling them to leave an estate worth up to £900,000 to their children before incurring IHT, assuming the estate includes a main residence valued at £250,000 or more.

In 2020, where an estate includes a home valued at £350,000 or more, the figure will increase to £1m before IHT is levied. 

In contrast, IHT is levied when wealth and property worth £325,000 or more is passed from a cohabitant to his or her partner, with no additional threshold available for a main residence.

IHT is then levied once again when that partner leaves the estate to their children if the estate is worth £325,000 or more, or £450,000 if it includes a main residence valued above £125,000. This means IHT is potentially levied twice and from less than half the threshold of a married couple on the combined estate of a cohabiting couple.

Depending on how wealth is split between the cohabiting couple and the order in which they die, beneficiaries can lose out to the tune of several hundred thousand pounds in comparison with what they would have inherited had the couple been married.

Cohabitants also lack the rights enjoyed by married or civil-partnered couples to inherit their partner’s Isa investments without losing the tax break on their cash.

A similar situation exists when it comes to pensions. Company pension schemes allow married and civil-partnered couples to name their spouse or partner as a beneficiary should they pass away, entitling the widow or widower to receive a yearly sum from the pension scheme on their partner’s death.

Under defined pension death benefits, the surviving spouse or civil partner typically gains 50 per cent of the deceased’s pension. The lack of a “survivor’s” pension for cohabitants means that globally billions of pounds are not being paid out as no claims can be made. 

To offset these complications, especially for occupational schemes, cohabiting couples can submit an expression of wish form to their pension scheme naming the cohabiting partner as the beneficiary upon death. Although not legally binding, this is a good way to inform a pension scheme where the benefits should go upon death.