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Cohabiting partners face Inheritance Tax shock, solicitors warn

Unmarried partners are facing an Inheritance Tax shock if they fail to prepare for the future, experts have warned.

The notice, published by Solicitors for the Elderly (SFE), comes after research revealed that cohabitation is now the fastest growing relationship type in the UK.

According to the report, thousands of unmarried couples are potentially sitting on an Inheritance Tax bill worth thousands, or even hundreds of thousands, of pounds.

Under current laws, an individual can transfer all of their wealth to their partner tax-free, but only if they are married or in a civil partnership.

Any wealth transferred to a cohabiting partner, however, is taxed like normal, no matter how long they have been together.

Inheritance Tax is charged at 40 per cent on the value of your estate that is above the £325,000 threshold.

For example, if you and your cohabiting partner own a property worth £1 million and one of you dies, the surviving partner will inherit the first £325,000 tax-free, but the remaining £175,000 is taxable at a rate of 40 per cent – equal to £70,000 in tax.

The report comes after the Office for National Statistics (ONS) revealed that the proportion of families containing a cohabiting couple increased from 15.3 per cent to 18.4 per cent over the last decade – and is now the fastest growing family type in the UK.

Commenting on the report, SFE solicitor Elaine Roche said: “One of the things I’ve seen recently that people really don’t understand when it comes to Inheritance Tax is the matter of unmarried partners.

“If you are not married, there is no such things as a common law spouse, which many people just presume exists.

“If you live together and one of you dies and inherits the property, it ends up being taxable.”

Ms Roche added: “Some couples absolutely do not want to be married or have any automatic inheritance rights which is why they stay partnered.

“But if making this choice, you have to be aware of the tax implications you could be bringing on yourself.”

So, what is the solution?

If marriage is off the table, cohabiting couples can now consider civil partnerships. The law changed in 2019, meaning both opposite and same-sex couples can now enter into civil partnerships.

Cohabiting couples should also ensure that their Wills are up to date to ensure that their partner will inherit their estate. Should you die intestate (without a Will), the surviving cohabiting partner is not automatically entitled to anything.

For help and advice with related matters, please get in touch with our estate planning team today.