How unmarried couples can protect their finances

A reader asks what unmarried couples should do to protect themselves when they’ve accumulated significant assets:

What if you’re not married but [are] in a relationship? As far as I can see there are tax issues if you die but want to leave your money to your other half. Is there anything that can be done other than get married?

Yes! There are several steps cohabiting partners should take that don’t involve a walk down the aisle.

Law in the United Kingdom is as prejudiced against ‘living in sin’ as a firebrand preacher.

Moreover, you don’t earn ‘common-law marriage’ loyalty points for years of service.

I don’t

There are two major problems that place the unmarried at a serious disadvantage:

Intestacy – Cohabitees have no right to inherit if their partner dies without leaving a will. That can get very messy.

Inheritance tax – Married couples can inherit everything from each other tax-free. Cohabitees have no more protection – actually less protection – than the cat’s home.

The unmarried are treated as second-class citizens in many other situations, too. Here’s what I’ll cover below:

• Inheritance Tax
• Property
• Wills
• Bank accounts
• Debt
• Pensions
• Power of Attorney
• Where’s the paperwork?
• The compromise solution

I thought I knew this area inside out, because The Accumulators were not actually Mr & Mrs in the eyes of the law.

But further research has uncovered a surprising number of traps for the unwary.

That’s made this post ridiculously long, so please do skip to the most relevant sections for you and yours.

Monevator Minefield Warning – This article is about how to protect your finances if you’re unmarried and you stay together. Splitting up is another kettle of asset division. Luckily, there are plenty of lawyers who will help you with that.

Also while we’re preambling: the constituent countries of the UK have different legal systems. I live in England so my research is based on the English legal system. Wherever you are, please do your own research. I have personal experience of these issues, but I am not a trained lawyer.

Inheritance tax

Assuming you have a will, inheritance tax can be the next big problem for the unmarried.

Inheritance tax is not due on any assets you leave to your spouse or civil partner.

Not so if you’re unmarried.

Inheritance tax is typically due on the value of your estate above £325,000 left to anyone else – including your unmarried partner.

Your estate amounts to the value of your:

• Property
• Other assets (including crypto and life insurance policies not written into well-designed trusts)
• Money
• Possessions
• Minus debts and funeral expenses

What’s a possession? Will HMRC come round to value your toaster? (I wrote this as a joke but then discovered I wasn’t far off.)

You can see if the value of your estate breaches the inheritance tax threshold with the help of a handy calculator from Which.

And don’t forget your toaster.

Settling inheritance tax

Inheritance tax is paid from your estate before anyone else gets anything.

Your unmarried partner is in the tax firing line unless you can redesignate them as a charity, political party, or community amateur sports club.

(I assumed that’s doable but Mrs Accumulator A.F.C. was having none of it.)

The nightmare scenario is your estate doesn’t cover the bill, and your partner is forced to sell the house.

For many unmarried couples, their property is their biggest source of inheritance tax liability.

My plan was always to keep an eye on property prices, split the value of the house between us, and calculate our respective estates annually.

Keep up-to-date because you can be caught out surprisingly quickly in a rising stock and property market, especially if you factor in a high FIRE savings rate, too.

Alas there’s no simple way around inheritance tax for the unmarried, though the trust options I’ll get to in a minute may soften the blow.

In the immortal words of Beyoncé’s accountant, if you don’t want to pay inheritance tax then: “you shoulda put a ring on it.”

(Beyoncé’s accountant wasn’t as helpful as I hoped.)

Note: Inheritance Tax exemptions are available to business owners as well as those on active service in the armed forces, police, fireservice, and as paramedics. Too right.

Life polices written in trust

Various life assurance / life insurance options can help square circles such as:

• Ensuring an inheritance for your children from a previous relationship.
• Enabling your current partner to carry on living in the family home after your untimely demise.

Monevator contributor Mark Meldon wrote about using a life assurance policy wrapped in a trust to manage this situation for unmarried couples.

Life policies written in trust are another way to pay an inheritance tax bill you know is inevitable. Inheritance tax must be paid swiftly – within six months of your death. A life policy ensures funds are on hand, while the trust element stops the payout adding to your estate.

There are other niche trust options but mileage varies.

Property

How you own your home matters.

Tenants in common (Joint owners in Scotland)

Here you each own a defined share of the property. If you die, your share falls into your estate and is inherited by the beneficiary named in your will.

Don’t have a will? Then your unmarried partner has no right to your percentage of the property. None whatsoever. See the wills section. It’s outrageous.

That problem is solved if you make a will (and leave your property to your partner).

Ownership doesn’t have to be split 50-50 between tenants in common. That helps you manage uneven financial contributions.

It can also put your inheritance tax liability in the bucket less likely to be kicked. Say when one of you is much younger than the other.

For example, only 20% of the value of the house is added to your estate if that’s your share on death.

Obviously HMRC’s sniffer dogs perk up should you downgrade your share and pop your clogs shortly thereafter.

Tenants in common is the cleaner option if you break up or want to leave a slice of your property to your children.

Your care home fees are also means-tested against your share of the property, rather than its whole value as with joint tenants.

Joint tenants (Joint owners with a survivorship clause in Scotland)

You own the property together. Your share is intermingled like milky coffee and there’s no dotted line that divides it between you.

If you die, your co-owning partner takes the whole property. They’re not relying on you remembering them in a will.

You can’t – for example – have a drunken row, rewrite your will that night, name the local drugs baron as heir apparent to the house, have a fatal heart attack the next day, and exact the perfect revenge upon your partner.

No.

The right of survivorship gives your partner the last laugh because it trumps any property vengeance laced into your will.

Not a cunning plan…

Now I know what you’re thinking:

‘Aha! That gets us out of inheritance tax because I don’t have a property share to fall into my estate…’

HMRC has thought of that. Inheritance tax still applies in the case of unmarried couples who are joint tenants. You’re assumed to own the house 50-50.

I know what you’re thinking, part II:

‘Aha! Let’s rack up credit card debt and order an all-the-trimmings Dignitas blow-out because my unpaid creditors can’t claim against property that doesn’t pass to my estate…’

They’ve spoiled that sport, too. Your creditors can apply for an ‘Insolvency Administration Order’ within five years of you dropping off the log.

It’s messy, because it involves the courts, but creditors can force survivors to pay an amount up to the value of the deceased’s share of the property.

And one law firm thinks the courts are liable to rule in favour of the creditors:

Unless the circumstances are exceptional, the court must assume that the interests of the deceased’s creditors outweigh all other considerations.

Let’s not sully your memory with this nightmare.

What type of ownership do I have?

Your title deeds should reveal all, or you can find out via the Land Registry.

You can switch from joint tenants to tenants in common via a notice of severance.

Note, your inheritance tax property allowance is reduced by £1 for every £2 it’s worth over £2 million. Which is a nice problem to have.

Equity release and other schemes

Equity release can force the value of your estate below the inheritance tax threshold.

• A lifetime mortgage incurs debt that will be subtracted from your estate.
• A home reversion scheme reduces the value of your property because you sell a percentage of it to a finance company.

I wouldn’t choose either approach though purely to manage inheritance tax. I mention these schemes only as avenues for research – especially if you like dancing with the devil.

Another rabbit hole to explore is boosting your residence nil-rate band. You can do this by leaving your main property to a child or grandchild, including step and adopted children.

That can raise your inheritance tax threshold from £325,000 to £500,000.

This could work out if you’re confident that your partner and children get on very well.

It’s not clear to me if this option can be combined with a trust guaranteeing the right of your partner to stay in the house. (Jane Austen wrote the book on this.)

Wills

Here’s why unmarried life partners need a will – if you die without one then the bloody Queen inherits your estate before your partner:

This screenshot from the government’s intestacy tool shows that your partner is not even in the queue.

True, the list outlined in green reveals a long order of succession before your estate actually falls into the hands of the Queen.

But I don’t even know if I have any half-uncles, never mind whether they’ve got gambling debts they’d love to pay off by pawning Accumulator Towers.

Who knows who’ll come crawling out the woodwork?

I got a will purely to prevent my mum throwing Mrs Accumulator out onto the streets if I bought the farm. (Hi mum! I only put this in to test if you’ve read this far!)

Make a will, even if you’re in your twenties. Certainly the moment you buy a property together. Or have kids. Life only gets busier and more complicated.

You can easily get a mirror will for a good price from an online willmaker.

Bank accounts

Your unmarried partner can access any money in joint accounts without interruption should you snuff it first.

Balances in individual accounts will be frozen until your estate is settled – which can take an ungodly length of time.

Even if you run your finances separately, it makes sense to hold some money in joint accounts, especially if your partner relies on you to pay the lion’s share of the bills.

Obviously you wouldn’t provide them with a list of individual account password details. That would be wrong. That’d breach your bank’s terms and conditions. Very bad.

Joint accounts and inheritance tax

Odd though it sounds, most joint bank accounts are held as joint tenants. As opposed to tenants in common.

In other words, you co-own the funds. That’s why banks won’t block your partner’s access after you enter Valhalla.

But joint tenant ownership doesn’t protect you from inheritance tax.

HMRC will consider your estate to owe inheritance tax in proportion to your contribution to the joint account’s funds – according to various law firms.

If you deposit all the monies then the account falls 100% into your estate.

Moreover, if one partner withdraws more than they contributed, this can be deemed a gift. Inheritance tax is due if you die within seven years of making the gift and its value exceeds your annual gift allowance.

HMRC don’t bother with this if you’re married. Nnngh! The social pressure.

Debt

Debt is paid from your estate after death – assuming it’s not joint debt, and your partner didn’t sign up to a loan guarantee.

Obviously debt deducted from your estate will affect your partner’s financial standing if they’re due to inherit what’s left.

In the worst case, they can be forced to sell a shared asset such as the home to cover your outstanding debt. Marital status is irrelevant here.

Pensions

Pensions do not typically form part of your estate. This makes them an ideal asset storage facility for unmarried couples down on inheritance tax.

ISAs, however, do count towards your estate.

Monevator Minefield Warning – True tax efficiency balances your mix of ISAs and pensions against your income tax, annual allowance and lifetime allowance limits as well as inheritance tax. It’s a tricky trade-off.

Bizarrely, pensions do fall foul of inheritance tax when your beneficiary is legally entitled to benefit from them upon your death.

Yet you’re off the inheritance tax hook when the scheme’s administrator retains the discretion to pay whoever they want.

You may have noticed this discretionary catch on your pension’s ‘Expression of Wishes’ form – where you indicate who’s in line for your retirement jackpot.

The small print goes something like: “Thanks for this, we’ll consider it.” Words to that effect, anyway.

I used to think this was symptomatic of a bad attitude. If I put Mrs Accumulator on the form then I want Mrs Accumulator to get the dosh when I cop it, right?

Who else have they got in mind, eh? Mrs H Lansdown? Mr AJ Bell?

But it turns out the scheme was doing me a favour. Expression of Wishes wording is designed to enable your pension’s death benefits to sidestep your estate.

Not every pension scheme is set up as a discretionary trust – the type that helps you avoid inheritance tax unpleasantries.

Sizing up your pension’s small print

If you haven’t ever looked into this, then I suggest you:

• Check your scheme allows an unmarried partner to scoop the death benefits from your pension when you expire.
• Ensure the benefit is paid at the discretion of the pension’s trustees.
• Double-check lump sum payments are discretionary.
• Fill out an Expression of Wishes form for each pension. This is right up there with, ‘Get a will, for God’s sake.’

The scheme’s administrators do not have to follow your wishes. That’s key.

But the lack of social media outrage at pensioners living in cardboard boxes – while Mrs Lansdown eats cake –  makes me think the system probably works.

Note, the terminology isn’t consistent but can matter. Some providers may call their Expression of Wishes form a Nomination of Beneficiaries.

But I’ve discovered that nominating a beneficiary triggers the Inheritance Tax mousetrap for the Nest Pension. (Nest also offers an Expression of Wishes option that avoids inheritance tax.)

My own SIPPs give me a straightforward anti-inheritance tax route. But UK pensions are a patchwork quilt, so check your schemes’ details carefully.

If you have an annuity with death benefits then make sure it includes a similar discretionary feature. As long as the amount you hope to pass on is paid at the discretion of the annuity’s trustees then all should be well. Do your own research for more clarity.

Incidentally, ‘death benefits’ is the term used in the pension / insurance ‘biz’ for any largesse that might take the edge off your sad loss for those you leave behind.

A grey area

The other pension snag is that contributions made while you’re in ill-health, or within two years of death, may be caught up in the inheritance tax net.

The situation is as clear as North Sea fog, but it seems that if you live for two years after making a contribution, HMRC will likely deem it onside.

However it’s dead against people shovelling money into their pension, then promptly carking it in a puff of inheritance tax avoidance.

The taxman deals with this murk on a case-by-case basis.

So look after yourself and hang about to enjoy your own pension.

If you’d like to know more, then please hold while I transfer you to the relevant department.

And another thing…

Make sure your partner is the named recipient of any death-in-service benefits you’re entitled to via your work pension.

Also, unmarried couples can’t inherit any State Pension. Whereas married / civil partnered couples can, in particular circumstances.

Finally, some schemes definitively pay worse death benefits to unmarried partners. Mrs Accumulator’s defined benefit pension is like this.

It’s just another factor to take into account when you ponder the big picture. (Am I starting to sound like your parents?)

Power of attorney

Everyone should delegate power of attorney to a trusted loved one and, as ever, that goes double for unmarried partners.

These powers enable your partner to make health and financial decisions in your best interests should you lose the mental capacity.

• If you’re young, think about what could happen if you suffer a severe brain injury in an accident.
• If you’re older, think about strokes, dementia, and that should do it.

You can’t rely on institutions consistently consulting your unmarried partner instead of some nearest family member who pops up like a pantomime villain.

SCENE
The Accumulator is in a coma, hooked up to a life support machine.

Doctor: Shall I just turn him off then?

Mrs Accumulator: NOooo! There’s a chance my beloved might still make it back to me!

Evil half-uncle Nigel: Yep, flip the switch Doc. I want his Nintendo collection.

Doctor: Okay, then. [Flick. Beeeeeeeep.]

Don’t find that very convincing? You don’t know my half-uncle Nigel.

The point is: consider how much institutional friction an unmarried partner will face getting anything done the minute you fade from the scene.

Which is also why you should…

Sort out your paperwork

Make sure they know where to find everything when you’re gone. Even when they’re blinded by tears. (Hopefully.)

If you’ve read this far, it’s probable you’re the one who thinks about this stuff while your other half happily outsources the worry to you.

But there’s no point diligently ticking off these measures to protect them, if they don’t know you’ve done it; or don’t remember, or can’t access the necessary proof.

So come up with a system. How about a heartfelt letter kept somewhere they will definitely look should they ever need it?

That’s an expression of love in itself. And even if they don’t seem super-interested, it’s probably because they don’t want to think about your impending doom. That’s an expression of love, too.

And maybe they’re secretly paying attention.

Civil partnership

There’s a third way between marriage and unmarriage now available to anyone in the UK1 and that, of course, is civil partnership.

Legally you enjoy the same benefits as a married couple.

Psychologically, it may suit you better than marriage.

It all depends on the reasons why you and your partner prefer to cohabit.

I can only speak personally.

Mrs Accumulator and I ‘lived in sin’2 for 28 years. Marriage wasn’t for us for reasons that are personal and difficult to articulate.

Somehow a Civil Partnership doesn’t come with the same baggage. As a non-traditional institution, it seemed less rigid to us, and we felt freer to remake it in our own image.

I asked Mrs Accumulator if she’d like to ‘get civilised’ on Christmas Day 2020.

She said “Yes,” and we finally reached civilisation in a short, fun, and emotional ceremony in August 2021.

It was a great day spent in the delightful company of our close family. If anything it’s brought us closer together – another happy, shared memory, and another thing to rib each other about.

Meanwhile, in the back of my mind, I’ve quit worrying about all the faff I’ve spelled out in this post. Inheritance Tax, evil half-uncle Nigel, all of it.

Well, nearly all. You’ll still need Power of Attorney. And a will won’t hurt.

Take it steady,

The Accumulator

p.s. Final thoughts

Who am I? Jerry Springer?

I thought it’s just worth mentioning that the uncertainties and outright disadvantages of cohabiting can creep up on you.

One minute you’re a pair of moon-eyed lovebirds without a brass razoo between you. The next, you’ve mothballed your Tinder accounts and built a life together.

Yet the law gives you no claim on each other’s assets, whatever your intentions.

Youthful invincibility fades and assets accumulate. Protect them as best you can and keep each other safe. Don’t leave it to chance.

1. If you’re over age 18 or over 16 with parent / guardian permission. I predict zero people between the ages of 16 to 17 are presently enjoying this article though, and rightly so. [↩]
2. That’s just my way of glamming it up a bit. I don’t believe in this sin BS. [↩]