First published by What Investment on 8 February 2022.
Relationship break ups need not be hard to do - Kay Ingram advises on finances on finances including pensions, property, and debt.
Marriage in England & Wales has declined from 36 per 1,000 in 1973 to 20.3 in 2017 while there are 3.4 million cohabiting couples in the UK. There are significant financial consequences flowing from the legal status of relationships. Here we examine how marital status affects property rights, taxation and benefits, pensions and inheritance and the steps which cohabitants, spouses and civil partners can take to protect their finances.
Property may be owned by one of the couple or jointly. This can be as joint tenants or as tenants in common. Joint tenancy provides on death the property automatically reverts to the survivor, whereas tenants in common may dispose of their share of the property independently. On death this is determined by their will, or if there is no will, the law of intestacy.
Under intestacy law a spouse or civil partner has an automatic right to a share of the estate. This varies, depending upon whether there are surviving children of the deceased. Cohabitants have no automatic rights and would need to apply to court and prove a degree of dependency to gain any share. Having a valid will which provides for family circumstances is the best option.
In the event of a breakup spouses and civil partners have a legal duty to financially support each other and to a share of each other’s assets, determined by divorce law, unless precluded by a valid pre-nuptial agreement. Cohabitants have no automatic rights, except where children of the relationship are under age 18, when the Children Act could require a parent to provide a property and ongoing child maintenance*. Once the child is 18 the property reverts to the parent who provided it, potentially leaving their ex-partner homeless.
Where a home is rented the tenancy agreement is usually in joint names. If not, the landlord may be unwilling to switch the tenancy and the unnamed party must move out.
Liabilities and Debts
A cohabitant isn’t liable for the debts of their partner, where these arise from an account in their sole name but will be liable for debts accrued on joint assets, even if they were unaware of them.
Taxation and Benefits
Spouses and civil partners enjoy numerous tax advantages compared to cohabitants. Exemption from inheritance tax and capital gains tax when assets are transferred between them. Marriage allowance which increases tax free income by 10%, if earning under £50,270.
A surviving spouse/civil partner inherits the deceased’s unused inheritance tax allowances, enabling up to £1 million to be passed on tax free. They may also keep any Individual Savings Accounts of the deceased invested tax free, concessions unavailable to cohabitants.
Cohabitants who each own residential property, may each nominate a principal residence which is exempt from capital gains tax. Spouses / civil partners can have one tax free property between them nine months from marriage.
Bereaved spouses and civil partners of working age may apply for an allowance of £4,300 plus £9,800 if there are children under 20 in education. Cohabitants may only claim the allowance for children of the deceased.
Means tested benefits such as Tax Credits, Child Benefit and Universal Credit take account of household income when determining eligibility, regardless of the marital status of the claimant.
Pensions and Life Assurance
On divorce private pensions are included in the assets to be divided. They can be transferred by court order between the parties or offset against other assets. Alternatively, the court may require the pension to be paid directly to the ex-spouse. Cohabitants have no entitlement to a partner’s pension.
The basic state pension is ignored in divorce, but any State earnings related pension may be shared or offset against other assets. Cohabitees have no rights to pension shares on break up. The new State pension doesn’t provide dependant’s pensions, except for credits earned before April 2016, but excludes cohabitants.
Private pensions scheme rules determine benefits payable on death. In many defined benefit schemes cohabitants are ineligible, or payment is discretionary. The definition of eligible spouse/civil partner may also vary.
Where the pension is a pot of money built up from investments, or a lump sum payable on death, the scope of eligible recipients is wider, but an up-to-date nomination of beneficiaries is key.
Like pre-nuptial agreements, cohabiting couples can set out what they wish to happen in the event of a breakup. Family lawyer, Nikki Aston of Shakespeare Martineau, encourages couples to have a conversation about what they want to happen and to follow this up with a legally binding agreement following independent legal advice. She sees this as valuable insurance against things going wrong.
Kirsty Morris, family law partner at Burgess Mee, blames lack of public awareness of cohabitation agreements on low take up and the perpetual myth of “common law spouse” status, which can leave cohabitants who break up with no protection. Without an agreement their only recourse is to costly civil court action, providing limited financial provision for children and less certainty of outcome than the divorce process.
Resolution, the family lawyers’ professional body, has long lobbied for greater certainty for cohabitants who break up or are bereaved. The House of Lords has debated the Cohabitation Rights Bill but none of the lawyers I spoke to are expecting any progress on this soon.
*The Children Act does not apply in Scotland.