Should HMRC be doing more to keep it in the family

Recent statistics published by the Office for National Statistics show that for the first time since records began, more unmarried women have given birth than those who are married or in a civil partnership. In light of this, Resolution, a membership organisation for family law professionals, is campaigning for more legal rights and protections for cohabiting couples, as currently the law does not recognise these couples in the same way as those who are married or in a civil partnership. In addition, the tax position for cohabiting couples is still vastly inferior to their married equivalents.

The topic of family taxation has also been put firmly on the agenda by Liz Truss, who has called for more flexibility for families and has proposed changes to allow a non-working spouse’s personal income tax allowance to be transferable in full to their working spouse. Although the detail isn’t clear yet, this is likely to be an extension to the marriage allowance. If that’s the case, the potential additional tax saving from the proposal would be £2,262 per year – which, on the face of it, would only be accessible to those who are married or in a civil partnership.

A marriage and civil partnership also provide benefits from an Inheritance Tax (IHT) perspective, as gifts and legacies between spouses and civil partners are generally tax free. As a result, any IHT liability can often be deferred until both spouses have died, and both spouses’ allowances can be utilised on the second death – significantly different to the position where partners are unmarried.

Cohabiting couples do not enjoy the same tax treatment, and a bereaved partner may find themselves with a significant IHT liability to fund on the death of a partner. All individuals have a nil rate band of £325,000, and usually a residential nil rate band (RNRB) of £175,000, to offset against gifts on death. However, the RNRB is not typically available if the family home is left to the bereaved partner of a cohabiting couple. With house prices at an all-time high, bereaved partners may find themselves with a liability of 40% of any value in excess of £325,000.

The only aspect where HMRC treats cohabiting couples equally is in the clawback of child benefit, which becomes repayable where one of the couple earns in excess of £50,000 per annum. Perversely, this provision covers all cohabiting partners from the date that they move in together, even where one is not the child’s parent, or the partners keep their financial affairs entirely separate.

With family taxation becoming an area of focus in the Tory leadership race, part of the question to answer will be what constitutes a family for tax purposes. As fewer couples are formalising their relationship with a marriage, should the next prime minister consider whether the tax system could better cater for less traditional family structures and introduce greater parity between the tax treatment for married couples and those who are in committed long term relationships, but haven’t walked down the aisle?