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How cohabiting couples should protect their finances

Date:28 JAN 2021
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A cohabitation agreement

Historically, cohabitation agreements, sometimes known as “no-Nups”, were frowned upon as they were seen to encourage sexual relations outside of marriage. Thankfully, times have moved on and that’s no longer the case. The general view is that such agreements are enforceable if they deal with cohabitees’ property and affairs, and provided they are entered into freely with full information. Often, disputes between cohabitees following separation relate to what was or wasn’t intended, for example, in relation to the property in which they live. Having a clear record of the cohabitees’ intentions in a cohabitation agreement can avoid expensive disputes about those issues

Jointly held assets

Contrary to popular opinion, there’s no such thing as a ‘common-law spouse’ in English law. Simply living with someone doesn’t create joint assets. Rather, any bank accounts or investments held in joint names will be considered joint assets, as will any real estate held in joint names. Equally, any items purchased using joint funds, or to which each cohabitee contributed towards the purchase price, will likely be joint assets. Things get tricky where an asset is held by one cohabitee or purchased by one cohabitee (e.g. a property), but the other cohabitee says there was an understanding that it would be shared jointly. In that scenario the court can find itself having to decide who is or isn’t telling the truth. That can be a long and expensive process. It is therefore always better for any such agreements to be recorded in a cohabitation agreement. That agreement could, for example, also record that all assets will not be joint property unless held in joint names. That can remove any element of doubt.

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Shared property

Cohabitees falling out about co-ownership of property is an all-too-frequent occurrence and a complicated area of the law. If you are simply paying ‘rent’ it is very unlikely you will have any rights in the event of a break-up. Paying rent assumes that the property is owned by one party and the other is paying for the ability to live there. That is different to co-ownership. If it is intended that a property is co-owned, then it is absolutely vital that is recorded in a cohabitation agreement or deed of trust. A valid declaration recording the intentions of the cohabitees regarding co ownership will, in the vast majority of cases, be held to be binding and will likely avoid the need for expensive court proceedings if things turn sour.

Your pension

A cohabitee will not have any right to share in your pension during your lifetime. You are free to nominate them as a beneficiary of your pension if you pass away, but doing so does not create any rights should you subsequently (prior to death!) change your mind. If you do wish your cohabitee to receive a survivor’s pension after your death, you should always make sure you nominate them appropriately using a form from your pension provider.

Your Will

If you are living with someone, it is vital your will records your up-to-date intentions regarding your estate. For example, depending on how you own any jointly owned property, your will should record what should happen to your share in the event of your death. It should also appoint any guardians for your children when you are not there to care for them. Having an up-to-date will properly recording your intentions can avoid the nightmare scenario of your loved ones arguing over your estate after your death. It is an unfortunate fact that, if you pass away without a will, your cohabitee will not have an automatic right to share in your estate.

Taxes

Every individual has an inheritance tax (IHT) nil-rate band, currently set at £325k. Further, spouses do not pay IHT on assets given to them upon death by the other spouse. For married couples, the nil rate band is transferrable between them meaning that the surviving spouse may have a nil-rate band available to them of £650k. However, those rules do not apply to cohabitees. As a result, any value in an estate over the nil-rate band left to the surviving cohabitee will be taxed at 40% (if exemptions are not available). That can cause very real problems if the surviving cohabitee does not have liquid funds to pay the required tax. Tax planning advice should always be sought.

This article was first published at www.stewartslaw.com and is reproduced with permission.

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