This is because Budget tax changes announced in October have thrown a spotlight on people’s relationship status - specifically, the inclusion of money-purchase pension pots into Inheritance Tax liabilities from April 2027, and the dilution of Business and Agricultural Property Reliefs against IHT from April 2026.
Emma Sterland, Chief Financial Planning Director at Evelyn Partners, says: ‘All the data suggests that marriage is in decline, at least over the long term, while cohabitation is very much on the rise. At a personal level this is obviously a matter of choice and preference – but couples need to understand how the law and tax rules might affect them, depending on their relationship status, and especially in the event one of them should die. That is not something many couples like to think about – but it’s a nettle that, if grasped earlier rather than later, could save a lot of stress and financial worries further down the line.’
Data last year revealed that for the first time the percentage of over-16s in England and Wales who are married or in a civil partnership fell below 50 per cent. The Office for National Statistics estimates that the 2022 figure had dropped to 49.4 per cent from 51.2 per cent a decade previously.
Meanwhile the latest figures show that the highest levels of cohabitation prior to an opposite-sex marriage were recorded in 2022 with 9 in 10 couples having previously cohabited. This compares with 59.6% of couples having cohabitated prior to marriage in 1994. The total number of cohabiting couples has increased from around 1.5 min 1996 to around 3.6 min 2021, an increase of 144%.
Emma adds: ‘There is an evident generational gap, with older cohorts containing higher proportions of married people and younger generations showing higher rates of cohabitation, but there are also high rates of divorce among the middle-aged, and even older couples. Many of those people don’t get married again but do enter into another long-term relationship, often cohabiting but not necessarily thinking about the financial implications. It’s always been the case that those in long-term relationships or cohabiting, by not getting married or entering into a civil partnership, forego some tax benefits, legal privileges and possibly some financial security . Many couples accept that with eyes open, making an informed choice, while others might be less aware. However, the IHT changes that the Chancellor made at the Budget have raised the possible tax jeopardy in family finances, particularly among older cohorts, meaning that even those couples who are clear-eyed about remaining unmarried could start to reassess. Our financial planners have certainly been having more discussions around marriage or civil partnership with older clients in long-term relationships since the Budget.'
A civil partnership is a legal relationship entered into by two people which is registered and provides couples with the same legal rights and duties that they would have in a lawful marriage – where we use ‘marriage’ or ‘married’ it’s understood the same rights confer to those in civil partnerships.
Pensions being brought into IHT liabilities
Emma says: ‘This is a significant tax change, as currently most money-purchase pension assets – including personal pensions like SIPPs and defined contribution workplace pensions – are exempt from IHT and have therefore been a very useful estate planning tool. The Budget move, which is due to come into effect in April 2027, will bring these assets into the estate for the calculation of IHT liabilities. It has, all other things being equal, strengthened the IHT case for getting married. This is because, as the policy stands and from that date, the spousal exemption from IHT will be pretty much the only way that pension assets outside the nil-rate bands can be protected from IHT with any certainty. Generally, all assets left to a spouse or civil partner are automatically exempt from IHT, and under the proposals as currently drafted, this will include those pension assets affected by the Budget change. Of course, the IHT problem might arise further down the line when the surviving spouse dies. While possibly benefitting from two sets of nil-rate bands, their remaining wealth could be inflated by the pension assets from the first death, potentially increasing IHT liability for their children or other beneficiaries – especially if they die soon after their spouse.
‘However, for those who are in a relationship but unmarried – whether co-habiting or not – the issue could arise on the first death, leading to potentially much greater IHT exposure than would currently be the case. It is likely that some older couples in long-term relationships will decide to tie the knot to make this problem go away, and it is a conversation that we are having with some clients. Anyone who is married should check their pension death benefit nomination, as after this rule change it might be best for many couples’ IHT purposes to stipulate that the pension is paid in total to your spouse when you die, rather than any portion left to children or other family members.’
The dilution of Business and Agricultural Property Reliefs against IHT
The Labour government announced at the Autumn 2024 Budget that, from April 2026, the availability of 100% relief for agricultural and business property would be capped. Assets eligible for 100% APR and those eligible for 100% BPR would qualify for full relief up to a sum of £1m. 50% relief would apply thereafter. The government is making assets eligible for BPR and APR (added together) count towards the £1m cap.
Emma says: ‘The most newsworthy aspect of this measure has been the much-debated impact on family farms. The Government has made much of an eye-catching number of £3m being able to be passed on tax-free by farmers. But that plays down the actual impact of the changes to IHT reliefs because this figure will not apply to the many farm businesses that are owned and run by single or divorced farmers. To arrive at the £3m figure the farmer would need to be married so they could claim two nil rate bands of £325,000 each, two residence nil rate bands of £175k and two £1m Agricultural Relief 100% bands, but in reality a limited number will be able to do this. Single farmers will only have one set of allowances. Even for married farmers, the residence nil rate band will only be available if the home is passed to children or grandchildren and the total estate including agricultural and business asset is less than £2m. If there are no children the RNRB will not be available at all and if the estate of either the farmer or his wife exceeds £2m it will rapidly disappear.
'Farmers who are fortunate enough to be married with children, and a relatively small farm will still need to take steps to arrange their assets to take advantage of all the allowances. In particular they need to be leaving agricultural assets to people other than their spouse on first death as the £1m band is not transferrable to the surviving spouse, and they need to keep the surviving spouse’s estate below the £2m to capture the RNRB. All this has led to calls for the Government to reconsider and at least make the £1m APR/BPR allowance transferrable on first death like the NRB and RNRB. Meanwhile, married entrepreneurs must look at how they own their business. A successful married entrepreneur who has a business held solely in their name could be looking at a substantial IHT bill under the new rules as they will only have one lot of £1m APR/BPR. That might mean the business has to be sold in the event of their death to fund the tax bill.
‘So they might seek to mitigate their future IHT liability by moving the business to shared ownership with their spouse. Their Wills might also need to be revised to make a gift on first death either to children or to trust rather than to the spouse. The changes in the Budget also mean that both husband and wife need to ensure that they use their allowances, particularly if they own business or agricultural assets. They need to try to keep the surviving spouse’s estate below £2m on second death to preserve the residential nil-rate band, which may mean gifting assets up to the nil-rate band on the first death. It might also mean trying to avoid bringing other assets into the estate like their own inheritances from parents. It can be tax-efficient to skip a generation and pass these straight on to grandchildren using a deed of variation.’
Other unromantic but pressing tax issues around relationships
The home of cohabiting partners
Emma says: ‘One of the most problematic issues lawyers and financial advisers encounter with cohabiting couples when one dies, concerns the home they lived in, perhaps for many years. Even if the deceased has made a valid will leaving the property, or their share of the property, to their partner, it might still have to be sold to pay an IHT bill. If the home has a high value, making up most of the deceased’s estate, then the survivor could face a substantial IHT bill, because neither the spousal exemption nor the residence nil-rate band will apply. The surviving partner might have few liquid assets to pay the tax bill with, and in the absence of sufficient liquid assets inherited from the deceased, a sale of the home could be forced to pay IHT, causing potential stress and upset.
‘None of this would be an issue if the couple were married.’
The bank of mum and dad
A survey recently found that more than half of young people in the UK say financial support from their parents comes ‘with strings attached’ - one of which was the condition that unmarried children who were buying properties with their partners must sign cohabitation agreements.
Emma says: ‘Even younger couples might find that their relationship status can have unexpected consequences. With finances stretched even among reasonably well-off families, generous parents are increasingly putting restrictions or conditions on gifts to their offspring. This is especially the case where they don’t wish to see their hard-earned wealth leave the family if things don’t go according to plan.’
Blended families
Emma says: 'Some of the most fractious inheritance disputes can occur among blended families. Where one or both partners in a relationship have children from previous relationships, the inheritance tax question can be clouded even further, and a huge number of issues can arise depending on how assets are owned, if and how Wills are drawn up or redrafted, and of course whether the couple ever gets married. These are issues that can only be comfortably and confidently ironed out by the couple first discussing and deciding what they want to do, and then enlisting the help of a good financial planner with estate planning experience, and a good lawyer.’
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