From 2002-2015 the proportion of adults cohabiting rose by a third from 7.5% to 10% but the amount of people of the state pension ago who were cohabiting almost tripled. The rate for those aged 65-69 rose from 1.5% to 4.5% and for those over 70 it rose from 0.7% to 2.3%.

Despite this growth the tax and benefits system still focuses on the assumption that the public is split into two categories: single people living alone or married people living together. Most tax benefit rules do not recognise cohabitation.

Inheritance tax (IHT)

Married couples can pass their wealth on to the surviving spouse free of inheritance tax and can also transfer any unused portion of their inheritance tax threshold to their spouse. Neither of these options are available to cohabiting couples.

Married couple can also transfer any unused portion of the new residential nil rate band, which is designed to help families pass their property to direct descendants in a tax efficient manner. When the nil rate band is fully implemented in 2020 it will be worth up to £350,000 to the surviving spouse however, the surviving cohabiting partner only has a £175,00 nil rate band. Based on an IHT rate of 40% excluded from this scheme, cohabiting partners are at a £70,000 disadvantage.

Income tax

There are two married couples allowances available – the old allowance which applies only to the oldest married couples and is worth up to £844 per year and the new marriage allowance, which was introduced in April 2015, which is worth £230 per year. Therefore a cohabiting couple in each of the three years since it was introduced would have missed out on £662.

If the estimated 75,000 taxpaying cohabiting couples have missed out the total loss would be around £50m.

State pension

Most of today’s pensioners reached pension age before 6th April 2016 under the old state pension system. Under the old system, there were extensive rights to derive an improved state pension following the death of a spouse; but these rights do not apply to cohabiting couples.

An older married woman could easily see her state pension boosted by around £2,500 per year following the death of her husband, but a cohabiting partner would miss out.

Helen Morrissey, personal finance specialist at Royal London said: ‘With each passing year more and more people are choosing to live together as couples, and it is amongst those over pension age where the growth has been the most dramatic. But individuals need to be aware that there are many tax breaks and state pension advantages which apply only to married couples.  

‘We hope that this research will help those who are living together as couples to gain a better understanding of their financial position. But we also want the government to review whether the tax and benefit system needs to be updated to reflect the world in which we now live, not the world of the 1940s.’