Inheritance Tax for Unmarried Couples

The spouse exemption is one of the most valuable reliefs in the inheritance tax system: assets passing between married couples or civil partners on death are entirely exempt, regardless of value, and any unused nil rate band and residence nil rate band from the first spouse to die can also be transferred to the survivor. This effectively allows a married couple's combined estate to grow substantially before inheritance tax becomes an issue.

None of this applies to unmarried couples, however long they have lived together or however interdependent their finances. Each partner is treated, for inheritance tax purposes, as a separate individual with their own £325,000 nil rate band and no ability to transfer unused allowances to the other.

Before even considering tax, unmarried couples face a more fundamental risk: if one partner dies without a will, the intestacy rules that decide who inherits do not recognise unmarried partners at all. Everything can pass to children, parents or other blood relatives, potentially leaving a surviving partner with no automatic right to the home they shared or any of the estate.

This makes having a valid will the single most important step for any unmarried couple, tax planning aside. Our guide on unmarried partner inheritance covers the intestacy position in full detail.

Consider an unmarried couple who jointly own a home worth £500,000 with combined savings. If one partner dies leaving everything to the other, that inheritance is assessed against the deceased's own nil rate band and, where the home passes to a direct descendant, potentially the residence nil rate band, but there is no spousal exemption to shelter it. Anything above the available thresholds is taxed at 40%.

A married couple in the identical financial position would pay no inheritance tax at all on the first death, because the spouse exemption removes the transfer from charge entirely, and both nil rate bands remain available for use on the second death. The gap between these two outcomes can run into tens of thousands of pounds.

Several approaches can help manage this exposure, though all need specialist advice tailored to your circumstances rather than a one-size-fits-all answer. Life insurance written in trust can provide a lump sum to cover an expected inheritance tax bill without that payout itself forming part of the estate. Lifetime gifting, subject to the seven year rule, can gradually reduce the taxable estate if started early enough.

How a shared property is owned also matters. Owning as tenants in common, rather than joint tenants, allows each partner's will to leave their share to whoever they choose, including each other, though it does not itself remove the inheritance tax exposure. See our guides on joint tenants and tenants in common for how ownership structure affects what happens on death.

Some couples who have not previously wanted to marry decide to do so, or to form a civil partnership, once they understand the scale of the tax and inheritance difference it makes. This is obviously a personal decision that should not be driven by tax alone, but it is worth knowing that it is the single most complete solution available under current law.

Whatever you decide, make sure your wills, and any property ownership structure, are reviewed together rather than in isolation, since each affects the other.