More and more couples in today's society are choosing not to get married and instead live together as cohabitants. Most cohabitants, however, will not be aware that by doing this they are potentially losing out on hundreds of thousands of pounds worth of Inheritance Tax savings.

Inheritance Tax is charged on the value of an individual's estate at the date of their death and is payable to HM Revenue and Customs. Every individual has a 'Nil Rate Band' allowance ("NRB") of £325,000 which applies against the value of their general estate. There is also a 'Residential Nil Rate Band' allowance ("RNRB") of £175,000 which is available where an individual leaves their main residential property to a lineal descendant (eg. a child or grandchild) via a Will or under the Rules of Intestacy (where there is no Will). However, if the value of the property is less than £175,000 the allowance is limited to the value of the property. Also, the RNRB starts to taper away when one’s estate exceeds £2m.

These allowances are transferrable between spouses, but not cohabitants. This means that where the NRB or RNRB allowance of a spouse is not exhausted on their death, the unused allowance can be utilised against the value of the estate of the surviving spouse. This is particularly significant where the Wills of a married couple are structured such that on the first death the estate passes outright to or for the benefit of the survivor. This is because transfers of value between spouses are exempt from Inheritance Tax, therefore the allowances of the first to die will not be utilised. Consequently, on the death of the surviving spouse, their estate will benefit from two lots of NRB and RNRB allowances. Should the value of the surviving spouses estate on their death not exceed £1m, there will be no inheritance tax liability. In broad terms, anything above £1m will be taxed at 40%.

Cohabitants, on the other hand, are not treated in the same way. Unused allowances cannot be transferred between cohabitants, which can often result in Inheritance Tax falling due on both the first and second death. With the rate of Inheritance Tax currently sitting at 40%, a sizable amount of the estate can be lost on each death.

Although some people will not lose sleep about the amount of Inheritance Tax payable when they die, others favour the idea of retaining as much of their accumulated wealth as possible to benefit their loved ones and future generations.

In light of the above, it is not outside the realms of possibility that the current Inheritance Tax benefits afforded to married couples have been a key consideration of an unmarried couple when deciding whether to 'tie the knot'.