A Cautionary Tale for Cohabiting Couples

A Cautionary Tale for Cohabiting Couples By Elizabeth Nicholls

As multiple UK lockdowns were enforced over the course of the pandemic, many friends of my generation made the decision to batten down the hatches and move in together. As we emerge out of lockdown, these friends have either fled the relationship with relief or they have transitioned into more permanent living arrangements, choosing to cohabit permanently.

However, these cohabiting couples should be alert to the fact that, in the long term, these couples will not have the same rights as married couples in respect of savings, possessions, shared property and estate planning. It is essential that cohabiting couples are aware of the ways in which they can minimise disputes and plan their estate effectively should they foresee cohabiting as a long-term arrangement. Below we outline a couple of considerations cohabiting couples should be alert to when considering their estate planning.

Property considerations

A cohabiting couple may run into issues when asserting their interests in a property they have lived in together in the event of a separation.

For example, Anthony and Barbara, decided to move in together at the beginning of the first lockdown into Anthony’s flat, where Anthony is the registered proprietor. During the course of their cohabitation, Barbara started making contributions to the mortgage and bills.

Anthony and Barbara asked me (in one of our regular cocktail Zooms) what the position would be if they split up?

Whilst Anthony continues to be the registered proprietor of the property, Barbara may face difficulties in asserting her claim or beneficial interest in the property which may have occurred by the mortgage contributions that she has made.

If Anthony and Barbara would like to formalise this and avoid any future dispute, a declaration of trust should be drawn up to confirm their beneficial interests in the property. A declaration of trust records exactly which contributions each of Anthony and Barbara are making to the property and sets out what happens to the proceeds of sale should the property be sold in the future and how these are apportioned between the two of them. A cohabiting couple who are sharing a property together should strongly consider this approach to avoid disputes further down the line.

Estate planning considerations

Anthony and Barbara may also be disadvantaged in respect of estate planning. There are tax reliefs available to spouses and civil partners on death that are currently not available to cohabitees.

The most significant of these reliefs to be aware of is in respect of Inheritance Tax. Spouses and civil partners can take advantage of the spouse exemption and leave their entire estate to each other inheritance tax free on death. Cohabitees however cannot take advantage of this exemption nor can they transfer their nil rate band or any remainder of it to their spouse or civil partner on death (currently £325,000). So, if Anthony were to die before Barbara leaving Barbara assets in excess of £325,000, an IHT charge at the rate of 40% will apply to Anthony’s estate.

It is important to note that cohabitees are also not accounted for in the statutory intestacy provisions - the scenario where an individual dies without leaving a will. Spouses and civil partners are entitled to £270,000 from their deceased’s partner’s estate, then 50% of the estate if there is surviving issue (or the whole estate if there is no surviving issue).

In the scenario where Anthony dies before Barbara and does not leave a will, Barbara’s interest as Anthony’s cohabiting partner would not be taken into consideration under the rules of intestacy. Whilst it is possible for Barbara to make a claim for provision on Anthony’s estate under the Inheritance (Provision for Family and Dependants) Act 1975 as a cohabitee, such a claim causes additional stress and cost at a time where the parties are grieving for the loss of a loved one. Furthermore, claims under the 1975 Act are famously unpredictable and there is no guaranteed outcome.

To avoid these pitfalls, we recommend approaching your estate planning with care and enlisting professional advice. If you wish to discuss any aspect of estate planning, declarations of trust or wills with a focus on cohabiting arrangements in further detail, please contact our Private Client team. Elizabeth is currently a trainee in the Private Client department at LBMW.