Marriage and Inheritance Tax: A Financial Wake-Up Call

Love should be the primary reason for marriage, but new proposed changes in inheritance tax laws may push some couples to reconsider their relationship status. Financial planner Scott Gallacher illustrates this point—if he doesn’t marry his long-term partner by April 2027, he faces a staggering £214,000 inheritance tax bill.

The Upcoming Changes in Inheritance Tax Regulations

In a recent announcement by Chancellor Rachel Reeves during the 2024 Autumn Budget, it was revealed that pensions will become subject to inheritance tax starting in April 2027. This change means that many cohabiting couples could face unexpected tax liabilities, especially if one partner passes away.

The Impact of Pension Inclusion on Estates

Gallacher, 51, from Leicester, is among those who may be affected. He has been with his partner for 29 years and engaged for 27, but their focus on financial stability, including buying a house, has delayed their wedding plans. His current financial situation includes a £700,000 pension, £150,000 equity in their home, and £10,000 in cash.

Under the existing law, his estate would not incur any inheritance tax, as he can utilize the £325,000 nil-rate band and a £125,000 main residence allowance. This means a total of £860,000 could be passed on without tax implications. However, including his pension in this equation post-April 2027 would result in a significant tax liability, reducing his estate to just £160,000 after the deduction.

Advocating for Awareness on Tax Policy Changes

Gallacher emphasizes the potential shock awaiting many cohabitating couples when these changes take effect. “I suspect there will be untold stories come April 2027 of couples unaware of their new tax burdens,” he states. Given that many individuals possess life insurance or property, the new regulations could force numerous estates above the inheritance tax exemption limit.

To help individuals understand the implications better, Rowley Turton has launched an inheritance tax calculator, tailored to assess how these upcoming changes could affect personal finances.

Should You Consider Marriage to Lower Your Inheritance Tax Liability?

Gallacher admits that his original plans for marriage weren’t primarily motivated by tax implications, but these new developments have expedited his decision. He notes the paradox for couples in religious unions that lack legal recognition under UK law: they face similar inheritance tax pitfalls that may prompt them to formalize their relationships.

The Financial Benefits of Marriage

Marriage offers unique financial advantages, especially when it comes to inheritance tax. Currently, the law favors married couples by allowing them to transfer assets to one another tax-free, a benefit not extended to unmarried partners. This distinction is crucial for financial planning, especially with looming changes.

Gallacher humorously points out the potential commercial upside, saying, “It’s a boon for the wedding industry and cake manufacturers.” Nonetheless, he cautions that even married couples may need financial advice to navigate the complexities of inheritance tax.

Conclusion: Preparing for Financial Change

As the April 2027 deadline approaches, it becomes crucial for couples—whether married, engaged, or cohabiting—to reassess their financial strategies in light of impending inheritance tax reforms. Understanding how pensions will be taxed can save loved ones from unintended financial struggles in the future.

Engaging with a financial advisor can help clarify the implications of these changes and guide couples through potential consequences. Ultimately, while love remains the central pillar of marriage, financial foresight must also play a role in relationship planning.