Cohabitating couples are at a disadvantage when it comes to inheritance tax (IHT). The spouse exemption means that married couples can pass assets between themselves, either during lifetime or in death, without any IHT being charged. By contrast, cohabitating couples do not benefit from this exemption and, subject to an initial tax-free sum (the nil rate band) and certain exemptions and reliefs, IHT is charged on the deceased's estate at 40%. The tax bill arising on the death of the first to die of an unmarried couple can be extremely onerous. The only form of relief available is that designed to prevent the forced sale of real property, such as the family home, to discharge the IHT bill. This relief means that it is possible to pay the IHT due on the family home, so long as it is not sold, by ten annual instalments, but those instalments bear interest and the IHT bill can still result in financial hardship.
Many older couples, in particular, focus on avoiding the looming prospect of the IHT burden on their families when deciding to get married rather than to cohabit.
There are similar provisions for capital gains tax (CGT) so that gifts during lifetime between spouses do not attract CGT, whereas between cohabitating couples there will be a CGT charge (highest tax rate currently 28%) on a gain arising on any asset given by one to the other.