Cohabiting families could face £82,000 inheritance tax bill under new rules

Moderately well-off couples who live together but aren’t married run the risk of an £82,000 inheritance tax bill from 2027, according to new analysis.

The partner of a working-age homeowner in England with an average-priced property (£290,395) and a moderate pension pot (£415,000) could face an inheritance tax (IHT) bill of £82,158 if their loved one dies after two years’ time – even if this is before reaching pension age, calculations from wealth manager Quilter found. Under changes announced in the Autumn Budget, pensions will be brought into the inheritance tax net from April 2027.

In many cohabiting households, the property is jointly owned (joint tenants), meaning only half its value is included in the estate. Even then, a typical family in England would still struggle to avoid an IHT bill of £24,079, purely because of the pension inclusion. Where the property is solely owned by the deceased, the bill is more than three times higher.

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Jon Greer, head of retirement policy at Quilter, said: “Charging inheritance tax on a pension someone could not access and will never be able to use due to passing away before the minimum pension age is even more unjust for cohabiting families who have no spousal relief or ability to transfer tax allowances.

“Married couples are protected by exemptions and allowances; cohabitees aren’t. Policymakers should consider carve-outs or transitional reliefs for working-age deaths, particularly when young children are involved.”

Without change, the soon-to-be enacted policy of inherited pensions being subject to IHT, even before the minimum pension age, “risks compounding the emotional toll of bereavement with a financial hit that can destabilise a family’s future despite raking in very little in additional revenue”, Greer added.

Myth of the common law marriage

Cohabiting couples represent around a fifth of those living together in the UK, and the number is rising. The number of cohabiting couple families in 2024 was 3.5 million (17.7% of all families), an increase from 3.1 million (16.4%) in 2014, according to the Office for National Statistics (ONS).

Whereas married couples and civil partners have certain legal rights and responsibilities upon divorce or death, cohabitants receive, in general, less protection. Upon death, cohabitants do not automatically inherit from their partner, but if they do, they do not benefit from the spousal exemption – where assets are passed on inheritance tax-free – or a transferable nil-rate band.

Many people believe in the so-called ‘common law marriage myth’, which is the false belief that after a certain amount of time of living together, the law treats cohabitants as if they were married, when this is not the case.

Changes to the inheritance tax rules around pensions are set to leave cohabiting couples even worse off than their married peers.

Until now, unspent pensions were typically passed on tax-free if the saver died before age 75, and especially before they could access them. HMRC has now confirmed that from April 2027, pension savings will count towards a person’s estate for IHT purposes regardless of age at death, unless covered by existing exemptions.

This means cohabiting families with young children who can’t take advantage of the tax breaks afforded to married couples will be far more exposed to potential IHT bills.

Inheritance tax and rising property prices

Rising house prices and frozen inheritance tax thresholds are already increasing families’ IHT bills. Inheritance tax income to the Treasury totalled £2.22 billion through the first quarter (April to June) of the 2025/26 financial year, according to the latest data from HMRC. The figure represents an increase in inheritance tax receipts of £134 million, or 6%, compared to the same period in 2024/25.

Quilter’s analysis showed how that could play out around the country for cohabiting couples now the rules around inheritance tax on pensions have been confirmed.

For example, in London, sole ownership of an average-priced home (£565,637) plus a £415,000 pension creates an IHT bill of £192,254 in 2027. If the home is jointly owned, that falls to £129,127 – still a severe hit for a grieving family without the protections available to married couples.

Across Wales, Scotland and Northern Ireland, where lower house prices meant there was typically no liability for families with similar pensions in the past, bills in joint-ownership cases will still be £23,891, £21,392 and £20,007 respectively.

According to property website Rightmove, asking prices are expected to rise by 4% in 2025 alone, meaning these liabilities are likely to grow even before the rules take effect.