Cohabiting Couples: Putting your Affairs in Order
Posted: 15th September 2022
Currently around 1 in 5 couples, equating to roughly 3.5 million couples, cohabit in England and Wales. Despite the increasing popularity, there remains the misconception that cohabiting couples are afforded the same legal protection as those married or in a civil partnership.
The importance of a Will
If an unmarried/non-civil partner dies without a Will, the survivor inherits nothing under the intestacy rules. This is in stark contrast to a married couple or couple in a civil partnership where the survivor would automatically inherit everything if there were no children or the first £270,000 and half of the rest if there were children. For a surviving unmarried/non-civil partner, the intestacy rules would dictate that, if the deceased has children, their estate would be split equally between them, and if they did not have children their surviving parents would inherit, and failing this, their siblings.
Should the survivor without provision wish to inherit under their late partner’s estate, they would typically have to embark on often lengthy and emotional stressful litigation by making a claim under the Inheritance (Provision for Family and Dependants) Act 1975, or hope that those benefitting financially will share their inheritance. Whilst adults with the requisite mental capacity can freely vary their entitlement, not all would be willing to do so especially if they were experiencing hardship, or ill-feeling towards the surviving partner. Inheritance cannot be redirected away from minors or those lacking capacity without court approval.
A Will can provide peace of mind for cohabiting couples that the survivor will be adequately provided for. A Will can also provide peace of mind that minor children will be cared for: guardians can be appointed to attend to a child’s well-being and trustees appointed to look after any financial provision made. Cohabiting couples must remember to revisit their Wills when they marry, as Wills are usually automatically revoked on marriage.
Joint assets
Assets held jointly as “joint tenants” will automatically pass to the surviving co-owner on death, even if a person stipulates something to the contrary in their Will. Assets held jointly as “tenants in common” will mean that the deceased’s share/interest will pass under their Will (or the laws of intestacy if there is no Will). Cohabiting couples holding joint assets should consider how they would like joint assets to pass on their death: it is possible to legally change any current arrangement.
Couples with children from previous relationships often hold, their home for example as “tenants in common” and set up Wills whereby they grant their partner a right to reside in their share of the home ending on death or remarriage, with the capital passing to their children on the right to reside ending.
Often the Will will allow this arrangement to be ported to a new property, enabling the survivor to move home if they so wish. Where property has been purchased in unequal contributions, it is best for couples to detail their respective shares in a declaration of trust so that there is clarity how assets will pass on death or separation.
Inheritance tax
Unmarried couples do not benefit from the same inheritance tax exemptions and allowances as married couples. This is demonstrated using the example of Bill and Joan below (based on current tax laws which are subject to change).
| Bill | Joan | Combined | ||||
| Cash & Investments: | £250,000 | £350,000 | £600,000 | |||
| Property: | £200,000 | £200,000 | £400,000 | |||
| £450,000 | £550,000 | £1,000,000 |
Joan dies first. Joan and Bill have mirror Wills passing everything to each other and then to Joan’s 2 adult children, Sara and Peter. They have made no lifetime gifts.
If Joan and Bill were married there would be no inheritance tax to pay. On Joan’s death all her assets would pass to Bill inheritance tax free by virtue of the spousal exemption. On Bill’s death his estate would benefit from his own nil-rate band (amounting to £325,000 inheritance tax free) and his wife’s full unused nil rate band (amounting to a further £325,000 inheritance tax free). As Bill passes a home, he has lived in, to his stepchildren, Bill’s estate would benefit from a further £350,000 inheritance tax free as his estate could utilise his own residential nil rate band of £175,000 and his late wife’s unused residential nil rate band of £175,000. Given the favourable inheritance tax and reliefs for married couples, Bill’s estate would only pay inheritance tax at 40% if it exceeded £1million (£325,000 + £325,000 + £175,000 + £175,000), which it does not.
If Joan and Bill were cohabiting, there would be an overall inheritance tax bill of £300,000. Joan’s estate would not pass inheritance tax free. Rather her estate would bear inheritance tax at 40% on that above her own nil rate band being £50,000 (£450,000 – £325,000 = £125,000 x 40%). Bill’s estate would only benefit from his own nil rate band and therefore on his death inheritance tax of £250,000 would be suffered (£950,000 -£325,000 = £635,000 x 40%). Bill’s executors would not be able to claim the residential nil rate band or transferable residential nil rate band as this is only available where a person passes their estate to children or stepchildren (or their descendants), and of course Sara and Peter are not Bill’s children or stepchildren.
Unmarried couples may wish to obtain legal and financial advice to understand their inheritance tax position and ways of mitigating inheritance tax, say by gifting, pension provision or life assurance policies.
Lasting powers of attorney for property & financial affairs and health & welfare
Lasting powers of attorney are extremely useful documents that ensure that those you trust (such as family members) can make important decisions for you if you can’t. If you put in place a lasting power of attorney for health & welfare, those you trust can decide, for example, where you live or what medical treatment you receive, if you lack capacity to make this decision yourself. If you put in place a lasting power of attorney for property & financial affairs those you trust could, for example, operate your bank accounts, pay bills (such as a mortgage or care home fees), and deal with your property, with your consent if you have capacity, and, when you lack capacity.
Let us consider the position of Pauline and Arlo, an unmarried couple. Pauline and Arlo were travelling back from holiday. They were involved in a motorway accident. Both were taken to hospital. Pauline recovered but Arlo sadly suffered a brain injury. As Arlo lacked mental capacity, he was unable to deal with their financial affairs and to make all decisions regarding his health and welfare. Unfortunately, although both had made wills neither had considered LPAs. Pauline was unable to access her partner’s accounts causing her great distress on top of the ongoing worry about Arlo’s condition. Pauline had to embark on the lengthy process of applying to the Court of Protection to become Arlo’s deputy to be able to pay the bills. When she was appointed deputy, she had to submit annual accounts to the Office of the Public Guardian to explain how she had spent her partner’s money. Pauline was consulted by medical, healthcare and social care professionals about what was in her partner’s best interest, but others decided on his care and treatment, when he was unable to himself.
Whilst lasting powers of attorney are often considered as people get older, they should be considered for all adults, as no-one knows when they may suffer an accident or illness.
Should you wish any further information or advice, the Wills, Trust and Probate Team at EMG Solicitors Limited would be delighted to help. Please contact us on 0191 338 6113 or email [email protected]