Which? uses cookies to improve our sites and by continuing you agree to our cookies policy.

Are you missing out on these lucrative tax breaks?

Older unmarried couples could lose out on inheritance and state pension benefits

Retired couple

The number of older couples living together unmarried has trebled over the past 13 years – and more than 300,000 could be missing out on tax breaks and perks worth potentially hundreds of thousands of pounds, according to a new research from insurer Royal London.

Married couples and civil partners enjoy the ability to pass on as much as £850,000 to their heirs inheritance tax free, while some can reduce their tax bill using the Marriage Allowance. Others may be able to inherit some of their spouse’s state pension.

Spouses and civil partners can also inherit their partner’s Isa savings and keep them in a tax-free, under rules introduced in April 2015.

Here, we explain the differences in tax perks for  married and unmarried couples. Jump to:

Unmarried older couples living together ‘rising’

Royal London’s research suggests that there are 3.2 million unmarried couples living together in England and Wales. While this may be common for younger couples, the insurer says that the fastest rate of growth has been among people aged pension age and above.

The ‘cohabitation rate’ of the 65 to 69 age group has trebled, from 1.5% in 2012 to 4.5% in 2015. The rate of unmarried cohabiting couples aged 70 and above have gone from 0.7% to 2.3% over the same period.

Royal London found that the ‘majority of older cohabiting couples are made up of people who have previously been married’  – suggesting despite the financial rewards on offer with marriage, many older cohabiting couples have decided not to tie the knot again.

Here are six major tax perks unmarried couples are potentially missing out on.

1. Marriage Allowance

What’s the tax break?

The Marriage Allowance allows married couples and civil partners to transfer any unused personal tax-free allowance to their spouse, helping them reduce their tax bill.

In 2017, you get a personal allowance of £11,500, and the Marriage Allowance allows you to transfer up to 10% of this – or £1,150 – to your spouse.

You need to be earning less than the personal allowance to have anything spare to pass on, and your spouse must earn less than £45,000, meaning they are a basic-rate (20%) taxpayer, to benefit from it.

How much do unmarried couples miss out on?

Marriage Allowance can save £230 in tax in the 2017-18 tax year. But you can backdate the allowance to the previous two tax years, meaning you could save as much as £662.

Find out more: marriage allowance explained

2. Married Couple’s Allowance

What’s the tax break?

This tax break can also save tax, but it is only available for couples in which one person was born before 6 April 1935.

The Married Couple’s Allowance is worth £8,445 in 2017-18 and, if you qualify, you can reduce your bill by 10% of this amount.

However, if your income is above a certain limit, married couple’s allowance is reduced by £1 for every £2 of additional income. Once you earn £28,000, the maximum you can claim is 10% of £3,260.

How much do unmarried couples miss out on?

The Married Couple’s Allowance could reduce your tax bill between by between £326 and £844.50 in the 2017-18 tax year.

Find out more: Married Couple’s Allowance explained

3. Inheritance tax

What’s the tax break?

Each individual can pass on £325,000 free of inheritance tax when they die. But spouses and civil partners can inherit their spouses assets tax free, in addition to any of their partner’s unused inheritance tax allowance, meaning a married couple or civil partnership can pass on £650,000 tax free in total.

New rules introduced in April 2017 have given this a further boost. If your estate contains your home and it is passed onto a direct descendant, you add an extra £100,000 to your inheritance tax allowance in 2017-18.

This additional allowance – called the ‘residence nil-rate band’ – rises by £25,000 every year until 2020, when you’ll be able to pass on £500,000 individually and £1m as a married couple.

How much do unmarried couples miss out on?

Inheritance tax is charged at 40% above the ‘nil-rate band’ or the tax-free allowance each person has. Unmarried couples can’t inherit their partner’s unused allowance, nor can assets transfer to them tax-free. This means that £425,000 can be passed on tax free.

If one partner in an unmarried couple died with a £500,000 estate and left it all to their partner, they’d face an inheritance tax bill of £30,000. A married person could inherit their spouse’s assets tax-free.

Find out more: inheritance tax explained

4. State pension

What’s the tax break?

For people who qualified for the state pension before April 2016, there are a number of ways you can benefit by being married or in a civil partnership.

You needed 30 years’ worth of National Insurance contributions to get the full basic state pension, which is currently £122.30.

According to Royal London, many women retired without reaching this level, but can use their husband’s often longer National Insurance record to increase their own state pension when their spouse dies.

Spouses and civil partners can also inherit between 100% and 50% of any additional state pension their spouse has built up. This varies based by date of birth, as shown in the table below.

Man’s date of birth Woman’s date of birth Maximum % of their SERPS you can inherit
5 October 1937 or before 5 October 1942 or before 100%
6 October 1937 to 5 October 1939 6 October 1942 to 5 October 1944 90%
6 October 1939 to 5 October 1941 6 October 1944 to 5 October 1946 80%
6 October 1941 to 5 October 1943 6 October 1946 to 5 October 1948 70%
6 October 1943 to 5 October 1945 6 October 1948 to 6 July 1950 60%
6 October 1945 and after 6 July 1950 and after 50%
Source: Gov.uk

For those who qualified for the state pension after April 2016, half of any amount they get above the new basic state pension of £159.55 (as part of any additional state pension they’d built up under the old system) can be inherited by a spouse or civil partner.

How much do unmarried couples miss out on?

Royal London says it would not be unusual for a woman’s basic state pension to jump by £50 a week (or £2,600 a year) if they were to inherit their husband’s National Insurance record.

Find out more: The state pension explained

5. Inheritance Isas

What’s the tax break?

Isa savings used to be treated like any other aspect of your estate – they could be passed on to beneficiaries named in your will or through the laws of intestacy – but automatically lost the tax efficient ‘wrapper’ they enjoyed during your life.

That meant that if your spouse wanted to reinvest the savings you built up, they could only do so up to their maximum Isa allowance for that year.

As of April 2015 that’s no longer the case. Your spouse or civil partner is now entitled to keep your Isa savings without losing this tax shelter by getting a special, higher Isa allowance.

How much do unmarried couples miss out on?

Not only do unmarried partners inheriting these savings miss out on the chance to shelter them from tax, they also form part of the estate that they’re inheriting. This means they could be liable for inheritance tax should the estate of their partner exceed the tax-free thresholds.

Find out more: can I inherit an Isa?

6. Transferring assets

stocks and shares Isa investment

What’s the tax break?

If you hold stock-market investments outside of an Isa, such as shares, bonds or funds, you can make big tax savings by gifting them to your spouse. Most shares pay dividends – a chunk of the profits a company makes – to shareholders each year.

By making an irrevocable gift to your spouse, you can transfer your investments over to them without incurring capital gains tax. If they pay less income tax than you or don’t earn enough to pay tax, they can keep more profits.

How much do unmarried couples miss out on?

Everyone gets a £5,000 tax-free allowance on dividends. After that, basic-rate taxpayers pay 7% dividend tax, higher-rate 32.5% and additional-rate 38.1%. Bonds pay interest and are taxed like income, so gifting them can save 20% to 45%, depending on your spouse’s tax status.

Capital gains tax on shares is 10% for basic-rate taxpayers and 18% for higher and additional-rate taxpayers.

Find out more: tax on dividends explained

Back to top