Have you ever stopped to think about what happens to your partner’s assets if the unthinkable occurs? For couples who share a home but aren’t married, this question is becoming more urgent. New tax rules set to take effect in 2027 could leave cohabiting families with unexpected financial burdens, particularly when it comes to inheritance tax. I’ve always believed that love shouldn’t come with a tax penalty, yet for many unmarried couples, that’s exactly what’s on the horizon. Let’s dive into how these changes could affect you and what steps you can take to protect your future.
The Growing Financial Risks for Cohabiting Couples
Living together without tying the knot is increasingly common. In fact, recent data shows that around one in five couples in the UK now cohabit rather than marry. It’s a lifestyle choice that offers flexibility and freedom, but it comes with hidden risks—especially when it comes to finances. From 2027, new inheritance tax rules will include pensions in estate calculations, potentially hitting unmarried partners with significant tax bills. For a couple with an average home and a modest pension, this could mean a tax hit of over £80,000. That’s not pocket change, and it’s a burden that married couples largely avoid thanks to spousal exemptions.
The new rules feel like a punch in the gut for couples who choose not to marry. It’s as if the system is penalizing personal choice.
– Financial advisor
So, why is this happening? The government’s decision to include pensions in inheritance tax calculations is a game-changer. Previously, if someone passed away before age 75, their unspent pension could often be passed on tax-free. Now, regardless of age, those savings will count toward the estate, and for cohabiting couples, there’s no safety net like the one married couples enjoy. Let’s break down the key issues and explore what this means for you.
The Myth of Common Law Marriage
One of the biggest misconceptions I’ve come across is the idea of common law marriage. Many people assume that living together for a certain period grants you the same legal protections as marriage. Spoiler alert: it doesn’t. In the UK, cohabiting couples have fewer rights when it comes to inheritance, and the new tax rules only widen this gap. Unlike married couples, who benefit from spousal exemptions and transferable tax allowances, cohabitants face the full brunt of inheritance tax on assets passed to them.
Here’s a quick reality check: if your partner passes away and leaves you their share of a jointly owned home or a pension pot, you could be taxed at 40% on anything above the nil-rate band (£325,000) and the residence nil-rate band (£175,000, if applicable). For a couple with a home worth £290,000 and a pension of £415,000, the math gets ugly fast. If the property is solely owned by the deceased, the surviving partner could face a tax bill of £82,158. Even with joint ownership, the bill could still hit £24,079.
- No spousal exemption: Married couples can pass assets to each other tax-free, but cohabitants don’t get this break.
- No transferable allowances: Spouses can transfer unused tax bands, potentially doubling their allowance to £1 million. Cohabitants? Zero.
- Pension inclusion: From 2027, pensions will count toward the estate, even if the deceased was too young to access them.
It’s a harsh reality, and it’s particularly tough for families with young children. Imagine grieving the loss of a partner while facing a tax bill that could destabilize your financial future. It’s not just unfair—it feels downright cruel.
Why Pensions Are the New Tax Target
Pensions have long been a tax-efficient way to save for the future, but the rules are shifting. Starting in April 2027, any unspent pension savings will be included in your estate for inheritance tax purposes. This is a big deal for cohabiting couples, especially if one partner dies before reaching pension age. Previously, pensions were often a tax-free lifeline for survivors. Now, they’re a potential tax trap.
Taxing a pension someone never had the chance to use feels like a betrayal of trust in the system.
– Retirement planning expert
Let’s say your partner has a pension worth £415,000 and passes away unexpectedly. If you’re not married, that pension is now part of their taxable estate. Combine it with other assets, like a home, and you’re quickly over the tax-free threshold. For couples in high-cost areas like London, where the average home price is £565,637, the tax bill could soar to £192,254 for sole ownership or £129,127 for joint ownership. That’s money you might not have lying around, forcing tough choices like selling the family home.
The Impact of Rising Property Prices
If you think the tax situation sounds bad now, just wait. Property prices are climbing, and they’re expected to rise by 4% in 2025 alone. This means more estates will cross the inheritance tax threshold, even for couples with modest assets. The government’s tax bands haven’t budged in years, which is like watching a slow-motion financial squeeze. More families are getting caught in the tax net, and cohabiting couples are particularly vulnerable.
| Region | Average House Price | Pension (£415,000) | IHT (Sole Ownership) | IHT (Joint Ownership) |
| England | £290,395 | £415,000 | £82,158 | £24,079 |
| London | £565,637 | £415,000 | £192,255 | £79,127 |
| Northern Ireland | £185,037 | £415,000 | £40,015 | £3,007 |
| Scotland | £191,927 | £415,000 | £42,771 | £4,385 |
| Wales | £209,580 | £415,000 | £49,832 | £7,916 |
These numbers paint a stark picture. In regions with lower property prices, like Northern Ireland or Scotland, cohabiting couples might have dodged inheritance tax in the past. Now, even joint ownership could trigger a bill of £3,000 to £8,000. In pricier areas, the hit is exponentially worse. It’s a reminder that financial planning isn’t just about today—it’s about preparing for the unexpected.
What Can Cohabiting Couples Do?
So, what’s the plan? If you’re cohabiting and worried about these changes, there are steps you can take to protect your partner and your family. I’ve always believed that proactive planning beats reactive panic, so here are some practical strategies to consider.
- Review property ownership: Switching to joint tenancy can reduce the taxable estate, as only half the property’s value is included. It’s a simple legal change that could save thousands.
- Write a will: Without a will, your partner might not inherit anything automatically. A clear will ensures your wishes are followed, though it won’t eliminate taxes.
- Consider marriage or civil partnership: If it aligns with your values, formalizing your relationship could unlock spousal exemptions and save your partner from hefty tax bills.
- Explore trusts: Setting up a trust for your pension or other assets can shield them from inheritance tax, though this requires expert advice.
- Plan for liquidity: Ensure your estate has enough cash to cover potential tax bills, so your partner isn’t forced to sell assets like the family home.
Each of these steps requires thought and, often, professional guidance. A financial advisor or estate planner can help you navigate the complexities and tailor a strategy to your situation. The key is to act before 2027, when the new rules kick in.
The Emotional and Financial Toll
Beyond the numbers, there’s an emotional side to this issue. Losing a partner is devastating enough without the added stress of a tax bill. For cohabiting couples with young children, the financial hit could disrupt everything from schooling to home stability. I can’t help but wonder: why does the system seem to punish those who choose a different path? It’s a question that policymakers need to address, perhaps by introducing relief for families with young dependents.
The emotional weight of loss shouldn’t be compounded by financial penalties. Couples deserve fairness, regardless of marital status.
– Family finance expert
In my experience, couples who plan together stay together—not just in life but in securing their legacy. Talking about death and taxes isn’t romantic, but it’s a conversation that can protect your loved ones from unnecessary hardship. Start by discussing your assets, your wishes, and your options. It’s not about mistrust; it’s about building a future that’s safe for both of you.
Looking Ahead: A Call for Fairness
As we approach 2027, the pressure is on for policymakers to reconsider these rules. Taxing pensions that someone never had the chance to use feels like a low blow, especially for cohabiting families. Perhaps the most frustrating part is how little revenue this change is expected to generate compared to the emotional and financial toll it will take. Could there be a carve-out for younger couples or those with dependents? It’s a question worth asking, and one I hope sparks debate.
For now, cohabiting couples need to take matters into their own hands. Whether it’s rethinking how you own your home, drafting a will, or exploring trusts, every step counts. The system may not be on your side, but with the right planning, you can protect your partner and your family from the worst of these changes. What’s your next move? If you’re cohabiting, now’s the time to start that conversation.
Key Takeaways for Cohabiting Couples: - Understand your tax exposure - Plan your estate early - Consider joint ownership - Seek professional advice
In the end, love is about building a life together, but it’s also about protecting each other. These new tax rules are a wake-up call for cohabiting couples to get serious about financial planning. Don’t let the system catch you off guard—take control of your future today.
