Cohabiting Couples Penalised Under Current Tax and Benefit System
New research by Royal London has highlighted that despite the recent rise in the number of couples choosing to cohabit rather than marry, many existing financial provisions, such as tax breaks and state pension rights, are only available to those who are legally married.
This has led Royal London to ask whether choosing not to marry can create a financial penalty for couples over pension age, and to question whether the Government should review the current tax and benefit system to better reflect today’s society.
Sharp Rise in Number of Cohabiting Couples
Royal London’s figures show that in England and Wales during 2002-2015, the proportion of adults who were cohabiting rose by about one third, from 7.5% to 10%. However, over the same period there was a tripling in the proportion of people over state pension age who were cohabiting.
Over 300,000 people aged over 65 now live together as part of an unmarried couple. Interestingly, the vast majority of these have previously been married but the marriage ended in divorce or in widowhood and they have chosen not to marry again.
Figures from the Office for National Statistics have revealed that the cohabiting couple family has been the fastest growing family type over the past 20 years in the UK – doubling from 1.5 million families in 1996 to 3.3 million families in 2016.
This suggests that the number of people over the age of 65 living together but not married is only set to increase, not decrease.
Cohabiting Couples Risk Losing Out
Despite this growing social trend, Royal London highlights that the tax and benefits system is still largely based around the assumption that adults are either single or married, and takes no account of cohabitation.
Three main areas where Royal London feels older cohabiting couples are at risk of losing out are:
- Inheritance tax (IHT) – members of married couples enjoy significant inheritance tax benefits over their cohabiting counterparts. They can pass their wealth to the surviving spouse free of IHT and they can also transfer any unused portion of their inheritance tax threshold to their spouse.
- Income tax – there are two special tax allowances for married couples only; the old Married Couples Allowance applies only to the oldest married couples and is worth up to £844 per year; and a new Marriage Allowance introduced in April 2015 that is worth £230 per year in 2017/18.
- State pension – most of today’s pensioners reached pension age before 6th April 2016 under the old state pension system, which gave rights to derive an improved state pension following the death of a spouse; but again these rights do not apply to cohabiting couples.
“With each passing year more and more people are choosing to live together as couples, and it is amongst those over pension age where the growth has been the most dramatic,” commented Helen Morrissey, Personal Finance Specialist at Royal London.
“But individuals need to be aware that there are many tax breaks and state pension advantages which apply only to married couples,” she added. “For example, the family of a cohabiting couple could face an extra £70,000 inheritance tax bill compared with the heirs of a married couple. Similarly, cohabiting couples are excluded from income tax breaks worth hundreds of pounds a year and from the rights to inherit a state pension when one partner dies.”
For expert legal advice on these issues, or other areas of family law, then contact our specialist family lawyers today.