What rights do cohabiting couples have and how can they best protect themselves?

Desmond O’Donnell from our Family team and Amy Lane from our Wills, Estate & Tax Planning team answer common questions about cohabitation.

Do people generally think that they’ll have the same legal rights as married couples in relation to money and property if they live together? If so, what causes this lack of awareness?

Desmond O’Donnell says: “The latest figures from the Office for National Statistics shows that the number of cohabiting couples has increased over the last ten years by 22.9%, to 3.6 million. Yet unmarried couples who are living together do not have the same rights as married couples or couples in a civil partnership. Contrary to popular belief, there is no concept of a ‘common law marriage’. Many clients who come to us for advice believe they are protected as a ‘common law spouse’, if they live together for several years. It comes as a shock to them to discover that there is no such status and therefore, no protection or automatic right to make financial claims against their former partner when the relationship ends.

“This can lead to great hardship and unfairness. For example, a former partner found himself having to vacate a home he had lived in with his former cohabitee for almost ten years because he had assumed incorrectly, that having contributed towards various utility bills (but not  the mortgage) during that time, he was automatically entitled to an interest in the property. Not so!”

What differences in legal rights are there for married couples and cohabiting couples that could affect their finances and make them financially vulnerable?

Desmond says: “When a marriage or civil partnership breaks down, a spouse can apply for financial orders under the Matrimonial Causes Act 1973, for example, spousal maintenance, an interest in a property, which is in the other spouse’s sole name, a lump sum or a share of the other spouse’s pension, even if they made no financial contribution during the marriage. Cohabitees on the other hand, are not similarly protected. In addition, unmarried couples have no automatic right to a share of their partner’s property in the event of their death, no automatic right to inherit their estate, no automatic right to various tax advantages and in many cases, no automatic right to receive the dead partner’s pension.”

Amy Lane adds: “Under English law, if a person does not have a valid will in place when he or she dies, his or her estate will be distributed in accordance with the intestacy rules; these rules do not provide for the survivor of a cohabiting couple. Under the intestacy rules, if the first cohabitee to die is also survived by children, his or her estate will be given to those children outright at 18; if there are no surviving children, the estate will be given outright to the deceased’s parents (or, if they have also died, to his or her siblings).  Although the surviving cohabitee may be able to make a claim from the deceased’s estate under the Inheritance (Provision for Family and Dependants) Act 1975, litigation is intrinsically stressful, expensive and a lengthy process.

“In addition, Inheritance Tax (IHT) is charged on an individual’s estate upon death at the rate of 40%. Each estate benefits from a nil-rate band amount which is taxed at 0%. The nil-rate band is currently £325,000 (less any gifts made in the seven years before death), so if one dies leaving a £400,000 estate and has a full unused nil-rate band, IHT is charged at 40% on the £75,000 excess. The principal IHT benefit available to married couples is spouse exemption. This allows one spouse to leave their entire estate to the other spouse free of IHT. In addition, the surviving spouse will inherit any unused nil-rate band from the first spouse to die which can be claimed when the second spouse dies. Therefore, a surviving spouse can inherit tax-free upon the first death, and then enjoy a nil-rate band of up to £650,000 to pass their estate on as they wish when they die.

“Unmarried couples do not benefit from the spousal exemption and cannot inherit each other’s nil-rate bands. Therefore, if you leave your estate to your partner upon death, they will have to pay IHT on any assets in excess of the nil-rate band. If you own a house, you may be able to benefit from the Residence Nil Rate Band (RNRB) (currently £175,000) when your property (or the net sale proceeds) are inherited by your lineal descendants i.e. children or grandchildren. However, whereas married couples can inherit each other’s RNRBs, unmarried couples cannot.”

Not everyone in a relationship will want to get married, even if doing so will give them a bit more financial security from a legal perspective. Is there anything cohabiting couples can do to make themselves financially resilient in case they split or one of them dies?

Desmond O’Donnell says: “A properly drafted cohabitation agreement can address many issues cohabiting couples may face if separating, without the need to make an application to the court. This is an agreement a couple can enter into, setting out their intentions and agreements, as to how financial matters are to be dealt with, in the event that the relationship breaks down. For example, the parties can agree to insert a clause in the agreement providing for the financial support of one party, by the other, most likely for a short period of time, to allow the party in the weaker financial position time to adjust to the change in their living arrangements. In addition, they can agree to include a clause in the agreement to nominate each other as a beneficiary, in relation to a percentage share of pension or death in service benefits. If there are children, arrangements can be made for their financial support too, over and above what the Child Maintenance Service may assess a party’s liability to be.

“Unmarried couples are advised to negotiate and execute a cohabitation agreement, with the assistance of their respective lawyers, to ensure that both of them fully understand what their respective rights and obligations are, for example in relation to their occupation and ownership of  the property, payment of bills, including the cost of repairs and improvements to it and even the ownership of the furniture. This will lead to less confusion and disagreement, in the event of the breakdown of their relationship. Obviously, if circumstances change during the relationship, such as the birth of children, or one party no longer being able to work and therefore, not able to make a financial contribution to household expenses, the couple can review their situation and if appropriate to do so, amend the cohabitation agreement to acknowledge this change in circumstances.

“In the unfortunate event of one partner filing a claim at court seeking for example, a share of the property, the other party can refer to the terms of the cohabitation agreement to rebut those claims. Alternatively, one can execute a cohabitation agreement (in addition to a declaration of trust) to confirm what interest each party has in a jointly owned property and what the arrangements would be if the parties separate. For example, the parties can agree which one will buy out the other party’s interest, or how long one party should have to vacate the property.

“Cohabitation agreements are legally binding contracts, provided they are drafted and executed properly, which is why it is essential to take legal advice before an agreement is prepared.”

Amy Lane adds: “It is really important that unmarried couples structure their affairs in a tax efficient manner. There are a few options unmarried couples can explore. For example using a trust created by a will, in order to ensure the chosen ultimate beneficiaries inherit the assets as intended. For instance, a couple may have children, but would want the surviving partner to be able to live in the house they own together.  A trust structure would allow the surviving partner to be able to continue living at the property, whilst protecting the underlying capital for the benefit of the children.  It would also stop the value of the assets one party would like their partner to benefit from potentially aggregating with their estate and IHT being paid twice i.e. on the first death and then on the second death.

“Alternatively, purchasing life assurance and placing it in trust for the benefit of your partner (and/or children) can be a useful tax planning method, as can tax efficient investments, or even considering a civil partnership in order for the estate on first death to benefit from the spouse exemption from IHT, as referred to above.”

Sections of the above answers first appeared in Money Marketing Magazine.