How Cohabiting Couples Should Protect Their Finances
A COHABITATION AGREEMENT
“They’re not the most romantic of things to discuss with a partner, but they’ll give some financial certainty to both sides. In a marriage there is some security in terms of finances and property; there should also be something in place for cohabitees to protect either interest or proceeds in the property. Should the relationship end, the agreement can spell out not only how the property will be split, but also what will happen to its contents or any joint purchases.” – Tom De Burgh Williams, chartered financial planner at Charles Stanley
“Historically, cohabitation agreements were frowned upon as they were seen to encourage sexual relations outside of marriage. Thankfully, times have moved on and that’s no longer the case. The general view is that such agreements are enforceable if they deal with cohabitees’ property and affairs, and provided they are entered into freely with full information. Often, disputes between cohabitees following separation relate to what was or wasn’t intended, for example, in relation to he property in which they live. Having a clear record of the cohabitees’ intentions in a cohabitation agreement can avoid expensive disputes about those issues.” – Ellie Hampson-Jones, an associate in the divorce and family team at Stewarts Law
JOINTLY HELD ASSETS
“Contrary to popular opinion, there’s no such thing as a ‘common-law spouse’ in English law. Simply living with someone doesn’t create joint assets. Rather, any bank accounts or investments held in joint names will be considered joint assets, as will any real estate held in joint names. Equally, any items purchased using joint funds, or to which each cohabitee contributed towards the purchase price, will likely be joint assets. Things get tricky where an asset is held by one cohabitee or purchased by one cohabitee (e.g. a property), but the other cohabitee says there was an understanding that it would be shared jointly. In that scenario the court can find itself having to decide who is or isn’t telling the truth. That can be a long and expensive process. It is therefore always better for any such agreements to be recorded in a cohabitation agreement. That agreement could, for example, also record that all assets will not be joint property unless held in joint names. That can remove any element of doubt.” – Ellie
“The first step is to draw up a list of assets that may need to be divided: pensions, property, savings accounts and investments. The house and pension fund pots will generally form the largest two assets and dividing them can be complicated. In marriage, assets are generally considered to be within a shared pot. When cohabiting, assets are personal unless jointly owned. Seeking help from a financial adviser or a lawyer could help with understanding what you’re entitled to and what you should be requesting.” – Tom
“If you and your partner hold joint assets such as a property, investments or even a bank account, it is important to understand the fine print. There are two types of shared ownership: ‘tenants in common’ (where you each own your own portion of an asset) and ‘joint tenants’ (where you both jointly own an asset and the share will automatically go to your partner if you die). Ensuring assets are held in ‘joint tenants’ can offer protection that assets will be passed on upon a partner’s death.” – Shona Lowe, private client & corporate director at 1825
SHARED PROPERTY
“Cohabitees falling out about co-ownership of property is an all-too-frequent occurrence and a complicated area of the law. If you are simply paying ‘rent’ it is very unlikely you will have any rights in the event of a break-up. Paying rent assumes that the property is owned by one party and the other is paying for the ability to live there. That is different to co-ownership. If it is intended that a property is co-owned, then it is absolutely vital that is recorded in a cohabitation agreement or deed of trust. A valid declaration recording the intentions of the cohabitees regarding co ownership will, in the vast majority of cases, be held to be binding and will likely avoid the need for expensive court proceedings if things turn sour.” – Ellie
“If one of you owns a property, then unless the other can show they have made contributions towards it, the property belongs to that partner. This is the case whether you are married or not. In the event you split up, and one of you has made contributions, you need to decide how those will be paid back.” – Tom
YOUR PENSION
“A cohabitee will not have any right to share in your pension during your lifetime. You are free to nominate them as a beneficiary of your pension if you pass away, but doing so does not create any rights should you subsequently (prior to death!) change your mind. If you do wish your cohabitee to receive a survivor’s pension after your death, you should always make sure you nominate them appropriately using a form from your pension provider.” – Ellie
YOUR WILL
“It’s important you and your partner each have a professionally drafted will in place, so that ‘intestacy’ rules do not have to come into play. These rules determine who inherits which assets and, crucially, unmarried partners are not considered potential beneficiaries. When there is no formal will in place, the surviving partner must raise a court action for reasonable financial provision, which only stretches to their ‘maintenance’ under the Inheritance Act, 1975. This has been known to cause significant family rifts as the partner could essentially be suing their own children. That’s not to mention the additional stress involved at an already difficult time, expense of the legal action and the fact that ultimately a court will decide what goes where. Involving a professional to make sure the right will and other legal documentation is in place (and kept appropriately updated), to check how joint assets are held, and to estimate inheritance tax liability or understand capital gains tax, can really help cohabiting couples get their finances in order and protect each other from financial issues in the future.” – Shona
“If you are living with someone, it is vital your will records your up-to-date intentions regarding your estate. For example, depending on how you own any jointly owned property, your will should record what should happen to your share in the event of your death. It should also appoint any guardians for your children when you are not there to care for them. Having an up-to-date will properly recording your intentions can avoid the nightmare scenario of your loved ones arguing over your estate after your death. It is an unfortunate fact that, if you pass away without a will, your cohabitee will not have an automatic right to share in your estate.” – Ellie
TAXES
“For cohabiting couples, the reality is that the rules around tax and the distribution of assets, should the worst happen, have not kept pace with the increasing prevalence of cohabitation. For example, when a married spouse dies, there is no inheritance tax to pay when the assets are transferred to the surviving spouse. For unmarried couples, there could be a tax bill – depending on the value of the estate. Capital gains tax (CGT) is also an issue for unmarried couples: married spouses can transfer assets to each other without worrying about a resulting CGT bill, but the same rules don’t apply for those co-habiting.” – Shona
“Every individual has an inheritance tax (IHT) nil-rate band, currently set at £325k. Further, spouses do not pay IHT on assets given to them upon death by the other spouse. For married couples, the nil rate band is transferrable between them meaning that the surviving spouse may have a nil-rate band available to them of £650k. However, those rules do not apply to cohabitees. As a result, any value in an estate over the nil-rate band left to the surviving cohabitee will be taxed at 40% (if exemptions are not available). That can cause very real problems if the surviving cohabitee does not have liquid funds to pay the required tax. Tax planning advice should always be sought.” – Ellie
For more information, contact Citizens Advice or read this from the Money Advice Service
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