Married vs unmarried couples – Inheritance Tax traps that could cost your family thousands
For many couples, the question of whether to marry is a personal one, often shaped by lifestyle choices, beliefs or past experiences.
However, this status is far more than just symbolic when it comes to your Inheritance Tax (IHT) obligations and has very real financial consequences.
We frequently encounter clients who have built a life together without tying the knot and are often unaware of the tax risks they are exposed to.
With announcements on the inclusion of pensions in IHT from April 2027, and with thresholds frozen until 2030, the gap between married and unmarried couples is set to widen further.
Unmarried couples don’t benefit from the spousal exemption
The biggest difference is that assets passed between married couples or civil partners are exempt from IHT.
If one partner dies and leaves everything to the other, no IHT is due, no matter the value of the estate.
Unmarried couples, however, do not benefit from this exemption.
This means if one partner leaves their estate to the other, anything above the nil rate band of £325,000 may be taxed at 40 per cent.
That could lead to substantial tax bills, even if the intention was simply to provide for the surviving partner.
No transferable allowances
Married couples and civil partners can combine unused allowances when the second partner passes away.
This includes both the nil rate band (£325,000) and the residence nil rate band (£175,000, if passing on a main home to direct descendants).
That can provide up to £1 million of IHT-free inheritance for their beneficiaries.
Unmarried couples don’t have this flexibility. Each partner has their own allowance, and anything unused cannot be transferred.
That could mean the estate is exposed to IHT at both stages of the couple’s passing rather than only once.
Pensions and the 2027 rule change
From 6 April 2027, defined contribution pensions will be included within the value of the estate for IHT purposes. This change will disproportionately affect unmarried couples.
Why? Because many people nominate their partner to receive their pension upon death.
From 2027, this pension could push the value of the deceased partner’s estate above the tax-free threshold.
Property ownership can complicate things further
Many couples co-own property. If the ownership is not structured correctly (e.g. as tenants in common), the share of the deceased partner might be considered part of their taxable estate.
If left to an unmarried partner, it may attract IHT if the total estate exceeds the available nil rate band.
In contrast, married couples can inherit each other’s share of the home without IHT, and the residence nil rate band can be used and transferred.
What can unmarried couples do?
The good news is that there are steps unmarried couples can take to mitigate potential IHT exposure:
- Review your Wills – Ensure your intentions are clearly set out. Without a Will, an unmarried partner may receive nothing at all under intestacy rules.
- Consider lifetime gifts – Giving away assets during your lifetime can reduce the value of your estate, particularly if you survive the gift by seven years.
- Pension nominations – Review and update your pension expression of wishes to match your estate planning goals.
- Get advice on property ownership – How your home is owned affects how it is taxed. Structuring ownership correctly can avoid unnecessary tax complications.
- Speak to a professional – Tax and estate planning is complex, especially with upcoming rule changes. Advice from our team can help make sure your affairs are structured as efficiently as possible.
The upcoming inclusion of pensions in IHT from 2027 means unmarried couples should now consider reviewing their estate plans to ensure assets are structured tax-efficiently and intended beneficiaries are properly provided for.
If you would like to review your IHT position or discuss how upcoming changes may affect your estate, get in touch with our team of tax advisers today.