Expert shares urgent tax warning to unmarried couples living together

Couples who are cohabiting but not married, regardless of their future marital intentions, have been alerted to the fact that their tax situation could be subject to significantly different rules and benefits compared to those who are married. The Office for National Statistics has disclosed that marriage rates returned to pre-pandemic levels in 2022. It also noted the "highest levels of cohabitation prior to an opposite-sex marriage", with nine out of 10 couples living together before getting married, and even higher rates observed before same-sex marriages.

This suggests a large demographic may be unaware of the tax implications of cohabiting without being married. Ben Glassman, Financial Planning Partner at top UK wealth management firm Evelyn Partners, highlighted that there are "often fewer rights and benefits conferred than they might think". Furthermore, he pointed out that couples who do decide to marry or enter into civil partnerships could benefit greatly by fully understanding all the tax advantages that come with such commitments.

Moving assets

In terms of moving assets, having a legally recognised relationship like a marriage or civil partnership allows partners to transfer assets such as cash, investments and properties without incurring tax liabilities, thanks to rules around inter-spousal transfers. Additionally, couples can make use of two sets of tax allowances, reports the Express.

These benefits and tax planning opportunities do not apply to cohabiting couples regardless of how long they have been together, so they may be liable for capital gains and inheritance tax purposes. Ben explained: "If a higher-rate taxpayer owns a buy-to-let property, they would pay income tax of 40% on the rental income. If their husband, wife or civil partner is a non-taxpayer, it could make sense for them to transfer the property, as their partner can use their basic personal allowance of £12,570."

"If the rental income is less than this allowance, it will be free from income tax, and if more than, then only basic rate tax will be paid."

Savings

Married couples and civil partners can combine their ISA allowances to a full £40,000 without any inheritance tax or capital gains tax implications and can optimise their own personal savings allowances to minimise the amount of tax they pay on interest earned. Currently basic-rate taxpayers can earn up to £1,000 in interest tax-free, higher-rate taxpayers £500 and additional-rate payers get no allowance.

Ben added: "Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these have been halved so that only £1,000 of dividends per person can be received tax-free. That halves again to just £500 from 6th April for the new tax year."

Marriage Allowance

Ben explained: "Finally, the annual Marriage Allowance is available to couples where one partner is earning less than the tax-free Personal Allowance of £12,570 per annum and the higher earning partner has earnings between £12,570 and £50,270 (£43,662 in Scotland)."

"The Marriage Allowance enables those eligible to transfer £1,260 of the lower earner's annual tax-free Personal Allowance to their spouse or civil partner, creating a tax saving of up to £252 a year."

Inheritance Tax

Regarding inheritance tax, unmarried couples can pass on a maximum of £325,000 tax-free using the nil rate band, or £500,000 with the residence nil rate band if their main home is passed onto children or grandchildren. In contrast, married couples have the advantage of leaving everything to their spouse tax-free, and the surviving partner can potentially combine any unused allowance from their deceased spouse for a total of £1 million tax-free, thus avoiding the 40% inheritance tax bill.

Cohabiting unmarried couples may encounter legal difficulties if one partner dies, as a cohabiting partner does not automatically have a legal claim to their partner's estate unless it is jointly owned or they have been living together for more than two years. Ben advised that cohabiting partners should make a will, noting that only 26% have done so, to ensure their wishes are followed regarding their estate after their death.

Moreover, when couples elected to live together - either freshly or over a drawn-out period - they can establish a cohabitation agreement. Ben suggests, "This can help to make sure that you are treated fairly in the event of separation or death. If you decide to get married in the future, the cohabitation agreement can quite easily be turned into a prenuptial agreement."