Unmarried Pensioners Who Live Together Miss Out On Tax Benefits

The tax system still categorises the public into single people living alone and married people living together. Yet, despite the growth of cohabiting couples most of which are pensioners, most of the tax benefit rules still do not recognise cohabitation.

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Tax Benefits that don’t apply to cohabiting couples:

  • Inheritance Tax (IHT)

When married couples pass their wealth on the surviving spouse, it is free of inheritance tax. They can also transfer any unused portion of their inheritance tax threshold to their spouse. However, neither of these tax benefits is available to cohabiting couples.

Also, any unused portion of their new residential nil rate band that is designed to help families pass their property to direct descendants in a tax efficient manner can be transferred by the married couple. When this is fully implemented in 2020, the nil rate band will be worth of up to £350,000 to the surviving spouse.  However, the surviving cohabiting partner only has £175,000 nil rate band. As a result, cohabiting partners are at a £70,000 disadvantage due to the IHT rate of 40% that is excluded from this scheme.

  • Income Tax

The two married couples allowances that are available are the old allowance that applies to the oldest married couple which is worth up to £844 per year and the new marriage allowance which is worth £230 per year. Unmarried couple living together will then miss out on £662.

  • State Pension

Under the old state pension system, there were extensive rights to derive an improved state pension following the death of a spouse but these rights do not apply to cohabiting couples. For example, an older married woman could easily see her state pension boosted by around £2,500 per year following the death of their husband but a cohabiting partner would miss out on this.

Now-a-days, more and more people are choosing to live together as couples and it is amongst those over pension age where the growth has been more striking. In line with this, government should reconsider whether the tax and benefit system needs to be updated in order to reflect the changes in the society we live in as of today instead of relying on the system that complements the society back in 1940s.

If you want more information or in need of advise,  please call 01772 788200 or email us at info@taxexpert.co.uk