Cohabiting Couples – What Financial Rights Do They Have?
In the UK, cohabiting couples are increasing rapidly. As it stands, six out of ten are living as a couple whilst 25% of them are not married but cohabiting. It is believed that those who are cohabiting have the same financial rights as those who are married but that is not the case. As a result, significant financial issues can arise if one partner passes away or if the relationship ends.
Common Law Marriage Does Not Exist
There is an assumption that those who live together are considered ‘Common Law’ husband and wives following a certain period of time together. Therefore, it is believed that they have the same legal rights as married couples. However, common law does not exist in the UK. Unless you have outlined your wishes in a cohabitation agreement and your Will, a couple living together will have less rights, so it can help to understand what rights you do have as a cohabiting couple.
Cohabiting Tax Habits – Are There Any?
Those couples in a relationship that is legally recognised will have some tax benefits but these are unfortunately, not applicable to cohabiting couples. This can include inter-spousal transfers of assets that are not susceptible to Capital Gains Tax and commonly, people will transfer large assets such as buy-to-let properties. This can help to reduce Income Tax should one person in the marriage be classed as a higher-rate taxpayer with the other being a lower-rate taxpayer. So, the higher-rate taxpayer could transfer the property to the lower rate taxpayer, which means that they can then use their basic personal allowance of £12,570. So, if the rental income is lower than this, they won’t have to pay income tax.
For those in a legal union (i.e. married or in a civil partnership) there is also a marriage allowance if one is a non-taxpayer and the other pays the basic rate of tax. They can transfer £1,260 to their partner which will come from their personal allowance, creating a £252 reduction in tax each year. Keep in mind they must be in a legal union not for those who are simply living together.
If You Separate, What Happens?
Ending a relationship is easier if you are not married but if you have been together for some time, then the separation can be much like a divorce. However, the situation can prove challenging when it comes to splitting assets because the same legal and financial rights as seen in a recognised relationship are not applicable.
PROPERTY RIGHTS FOR COHABITATING COUPLES
Many cohabiting couples live in a property that is owned by one person not both. The situation can remain in place for many years and both might end up paying the mortgage and sharing the running costs. If the couple part ways, then this can prove a problem for the person who does not own the property as they do not have an automatic rights to the property or any money that they have paid on invested into the property (unless this was explicitly mentioned in a cohabitation agreement).
It’s also possible that the property is owned by both parties which is known as tenants in common. Both will own a share of the property and that can be split equally or as agreed. Your share of the property will be passed to those that you leave it to in your Will. So, if you both own the property in a cohabiting relationship and separate, you might find that you have to live together until you come to an agreement.
PENSION AND INVESTMENTS RIGHTS FOR COHABITATING COUPLES
When it comes to pensions, if you are cohabiting and separate, you are not entitled to your ex partner’s pension automatically. The same is also applicable to savings and investments which means that they will remain in possession of the original owner unless any savings or investments were held in a joint account or they were outlined in a cohabitation agreement.
FINANCIAL OR child SUPPORT
As far as financial support goes, spousal support or spousal aliment is not readily available as it would be for those who divorce. However, when it comes to child maintenance, if you have had children in a cohabiting relationship then both parents will be responsible for paying towards their upbringing, regardless of whether they are married or cohabiting.
What Happens if a Partner Dies?
Losing a partner is a challenging time and finances and tax are often the last things you want to think about. So, this highlights the importance of having a Will that is up to date, particularly if you are cohabiting. If you don’t have a Will, the law will determine what happens to your assets and how they are divided. It will also mean that your partner might not be entitled to anything at all. If you have children, your estate will pass directly to them or it could pass to your parents or siblings. This can cause problems if you have a home as tenants in common or if it is owned by the individual who has passed away. This could result in your partner having to move out or even sell the property in order to pay the required inheritance tax to your next of kin.
INHERITANCE TAX FOR COHABITATING COUPLES
If you are cohabiting and leave assets that are valued beyond the nil rate band, then Inheritance Tax will be chargeable. The nil rate band and the residence nil rate band can be transferred between married couples and civil partners when they pass away. However, this is not possible for unmarried couples. This could have an impact on the amount of money that any children might receive.
how about PENSIONS?
What happens with a pension will depend on the type of pension you have. If you have a defined contribution pension then this can be passed to anyone you nominate. This means that it is important to complete the nomination of beneficiary paperwork.
A defined benefit pension can only be left to a husband, wife, civil partner or dependent child under the age of 23, so it cannot be passed on to a partner if you are not married.
All of this highlights the importance of ensuring you talk with your partner. If you don’t have plans to get married, a cohabitation agreement could help to ensure that everything is clear should you separate or if one passes away.
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