Inheritance Tax Planning for Cohabiting Couples: 4 major (neglected) issues

In a recent YouGov survey about cohabitees legal rights, 35% of cohabitees either did not know what legal rights they had or believed that once they had lived together for a year they automatically had the same rights as married couple. In fact, if a relationship breaks down, the court cannot reallocate resources between them on the grounds of fairness and neither party is able to claim maintenance from the other for their own benefit.

YouGov survey about cohabitees legal rights

In the survey, only 33% of the couples said that they had taken advice about their different options.  Consequently 40% of the couples had bought their home in the name of one partner, 13% were tenants in common and 41% bought as joint tenants.  It may be a surprise to learn that joint tenants are presumed to be equal owners regardless of the actual contribution they made to the purchase. Only around 50% of the cohabitees in our survey contributed equally to the deposit and a mere 42% paid equally towards the monthly mortgage repayments.  It would be wise for the remaining couples to buy as tenants in common and make a declaration of trust stating clearly each party’s share.

Issue no.1: Property Ownership

If a property is purchased in one name a court is unlikely to recognise another individuals claim upon it. Likewise, if the ‘Bank of Mum and Dad’ are involved in the purchase of a property it should be made absolutely clear whether they are buying a share of the property, offering a loan or making a gift.  A formal loan agreement is a practical option; the purchase should be in joint names, as tenants in common supported by a declaration of trust.   It is recommended that parents involved take advice on the tax and practical implications of purchasing a property.

Issue no.2: Death

Property owned by joint tenants passes automatically to the survivor regardless of any of the deceased’s bequests.  If either party wishes to leave their share in the property to a third party, the property should be held as tenants in common and a specific will made. The survey highlighted that a surprising 44% of the cohabiting couples had not made a will, so their assets will pass under intestacy rules which do not benefit unmarried partners at all.  Challenging this in a court is expensive and the outcome uncertain for a surviving partner, and making a Will is the only way to provide clarity and peace of mind.

Issue no.3: Children

Where surveyed cohabiting couples had children, 73% of them couldn’t determine what support their partner should give them on separation.   In fact, both parents are expected to pay to maintain their children until they complete their education.   The Child Maintenance Service assesses how much should be paid to the parent with the greatest caring responsibility and will enforce payment. The court cannot make a child maintenance order unless the paying parents’ gross weekly income exceeds £3,000.  If necessary, applications can be made for a lump sum, eg for a car, and as a one-off for the transfer or purchase of a property.   The property will be reverted to the paying parent once the child has finished full time education.

Issue no.4: Cohabitation Agreements

In the survey 76% of those cohabiting couples surveyed had never heard of cohabitation agreements, and only 10% had one in place.  These contracts cover the ownership of the finances and property and make financial provision for the children.

Conclusion

Despite many calls for a statutory framework for the fair distribution of cohabitees’ property in a relationship breakdown, in the short term law reform is unlikely.  Evidently numerous cohabitees are simply unaware of the potential circumstances that will arise if their relationship breaks down or one partner dies.  Anyone already cohabiting or contemplating it is strongly advised to take as much advice as possible in order to circumvent stressful disputes and avoid potentially distressing situations.  Let us help you.  Contact us for a free 30 minute consultation.