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SEPTEMBER 2011

In view of the Government’s recent decision not to endorse the Law Commission’s recommendations for reform of cohabitation law, what steps can be taken by unmarried couples in order to protect their interests and avoid financial disadvantage? Disputes between unmarried couples concerning ownership of property after the breakdown of their relationship have become increasingly common.  It is therefore no surprise that many commentators have not held back from expressing their disappointment at the Government’s decision to rule out, at least in this parliamentary term, proposals for reform which would have offered cohabitants additional rights. 

What rights do cohabitants have?

Following the end of a relationship which is neither a marriage nor a registered civil partnership, there is no set of rights which specifically protect proprietary and financial interests.  Limited protection can be obtained by invoking what the Law Commission has described as ‘a patchwork of legal rules which are complex, uncertain and expensive to rely on’.  Since there is no established framework of rights for unmarried couples, it is essential that arrangements are put in place to clarify and safeguard their interests in property and other assets. 

 How can cohabitants protect themselves?

The absence of any automatic legal protection does not prevent cohabitants from creating rights which would be available to married couples who subsequently get divorced.  A property can be co-owned as “joint tenants” or “tenants in common”. Where each owner is a joint tenant, each owns the whole of the asset rather than a distinct fractional share. In contrast if a property is owned by tenants in common, each owner has a separate share in that property.  At the very least, cohabitants who own a property as “tenants in common” should protect their interests by signing a Declaration of Trust, a document which records the shares in which the property is held and outlines the division of the net proceeds on a sale. 

Unmarried couples who live together can acquire further protection by drawing up a cohabitation agreement which provides certainty in the event of a relationship breakdown.  Such agreements are recognised by the English courts as being legally binding. A cohabitation agreement can deal with issues such as how ownership of any jointly owned property is to be split, payment of bills and other outgoings and childcare arrangements.  The agreement can provide for the way in which parties’ financial affairs can be regulated during the relationship and in the event of any breakdown. 

In addition to ensuring that there is an adequate structure in place for lifetime arrangements, it is important to be prepared for what happens to property on death by making Wills.  This is because unmarried cohabitants, unlike surviving spouses or civil partners, do not have an automatic right to inherit property from the deceased where he or she dies without a Will.  This is  particularly important when a property is held as tenants in common given that on the death of one of the tenants, the deceased’s share will pass in accordance with their Will or under the rules of intestacy, unlike a deceased joint tenant whose interest in the property will automatically pass to the surviving joint tenant.

Should cohabitants just get married or enter a civil partnership?

Many commentators who are opposed to reform of the current legal position maintain that unmarried cohabitants have an opportunity to acquire legal recognition and protection of their relationship through marriage or entering a civil partnership.  In addition to enhanced financial protection on divorce or dissolution, spouses and civil partners have access to significant tax advantages in relation to the disposal of their assets during their lifetime and on death.

Inheritance tax is charged at a rate of 40% on a person’s death.  However, all estates have the benefit of an inheritance tax threshold (currently £325,000) which is known as the ‘Nil Rate Band’.  Inheritance tax is charged only to the extent that it exceeds the Nil Rate Band.  In effect an inheritance tax charge arises on an estate which has a value of more than £325,000. 

The law permits married couples and civil partners to pass assets to each other during their lifetime or when they die without having to pay inheritance tax, provided that the spouse or civil partner who receives the assets has their permanent home in the UK.  There is no limit to the value of the assets which can be transferred between spouses or civil partners.  This is known as “spouse or civil partner exemption”.  Couples who are not married or in a civil partnership cannot benefit from this exemption.

If a person leaves their entire estate to their surviving spouse or civil partner it is exempt from Inheritance Tax regardless of whether the value of that estate exceeds the Nil Rate Band.  The added advantage of the spouse or civil partner exemption is that when assets are transferred the Nil Rate Band is not used up.  Married couples and civil partners are therefore entitled to transfer the unused portion of their Nil Rate Band in order to increase the inheritance tax threshold of the second spouse or civil partner when they die.  This applies even if the second spouse has remarried. This could result in up to £650,000 of the estate of the second spouse or civil partner being exempt from Inheritance Tax.  Again, this opportunity to minimise inheritance tax is not available to unmarried couples. 

Is reform likely to take place in the future?

Despite the Government’s U-turn, a spokesperson at the Ministry of Justice has confirmed that the Government is committed to transforming the family justice system and indicated that major reforms are already on the horizon.  Although this may indicate that the Government intends to implement proposals in a future Parliament, for the time being cohabitants should ensure that their interests are adequately protected by signing a Declaration of Trust where necessary, entering a legally binding cohabitation agreement and preparing Wills. 

 If you would like any further information about the issues raised in this article please contact Tim Langton (tlangton@gdlaw.co.uk), or any other member of Goodman Derrick LLP’s Private Client team on 0207 404 0606. 

 This guide is for general information and interest only and should not be relied upon as providing specific legal advice