It is a fact that, over recent years, the number of unmarried couples in the UK has been steadily increasing. According to the Office for National Statistics (ONS) around 5.9 million people were co-habiting in 2012.
This figure has doubled since 1996 and it is predicted and this will rise to one in four couples by 2031. Perhaps unsurprisingly, however, there is a common misconception regarding the rights and legal status of co-habiting couples. In fact 58 per cent of respondents to the British Social Attitudes Survey in 2006 thought that unmarried couples who live together for some time probably or definitely had a ‘common law marriage’ which gave them the same legal rights as married couples. Unfortunately, the reality is that unmarried couples simply do not attain similar rights, regardless of how long they may have been co-habiting. This means such individuals need to plan their finances more carefully than those who are married or in a civil partnership.
Whilst it is important for everyone to make a Will, this is absolutely essential for unmarried couples. Without a Will your estate would be distributed according to the rules of intestacy and, whilst these rules make provisions for spouses and civil partners, they don’t recognise unmarried partners. In reality this could mean your partner would get nothing with your estate passing to your blood relatives in a strict order of priority.
Whether you are a member of an employer’s pension scheme or have a personal pension plan it is important to complete an ‘expression of wishes’ form so the trustees of the scheme are aware of who you would like them to pay any pension death benefits. Whilst trustees ultimately have discretion over who receives any benefits, without a nomination there is a risk that their decision may not reflect your wishes. Care should also be taken in respect of any pensions already in payment because, although HM Revenue & Customs rules permit the payment of ‘dependents pensions’ to a partner on the death of a scheme member, this is subject to individual scheme rules. Some schemes may not have adopted this wider definition and may still make reference to a ‘spouse’s pension’ which would mean an unmarried partner would not qualify. It is therefore important to check individual scheme rules.
With the exception of any jointly owned policies, the proceeds of life policies you hold would be paid to your estate on death and distributed either under the terms of your Will or the intestacy rules. Following on from the earlier point made, where you don’t currently have a Will it is worth considering placing life policies in a suitable trust to ensure that your partner can benefit from the proceeds.
Inheritance tax (IHT) is a major problem for unmarried couples with substantial assets. This is because, whilst transfers between married couples and civil partners are exempt from IHT, there is no such exemption for unmarried individuals. This means that anything left to an unmarried partner over and above the ‘nil rate band’ (currently £325,000 for tax year 2013/14) would be subject to IHT at 40%. In addition, since October 2007, whilst it is possible to transfer any unused ‘nil rate band’ from a late spouse or civil partner to the second spouse or civil partner this does not apply to unmarried couples. So, for example, let’s say an unmarried individual with total assets of £250,000 leaves their entire estate to their partner. Whilst there would be no IHT due on this transfer the unused nil rate band of £75,000 could not be used by the survivor’s executors when ascertaining any IHT due on the survivor’s subsequent death.
Capital Gains Tax
The current rates of Capital Gains Tax (CGT) are 18% for basic-rate taxpayers and 28% for higher rate taxpayers. Where capital gains exceed the annual CGT exemption, spouses and civil partners are able to reduce their tax bill because they are able to first transfer ownership of the asset to the party paying CGT at the lower rate without creating a tax liability. Unfortunately unmarried couples do not benefit from this exemption so any transfers of assets between them – even as a gift – could trigger a liability to CGT on the transferor.
Bereavement allowance is payable to recently widowed spouses and civil partners, but cohabitees are not entitled to this benefit. Where a husband, wife or civil partner dies and their surviving spouse/ civil partner is over 45 but under state pension age the survivor may be entitled to bereavement allowance. This benefit is paid for 52 weeks after death, the amount depending on how much NI contributions the deceased had paid in their lifetime and the survivor’s age. Maximum weekly payments are £32.49 for a 45 year-old, rising to £108.30 for those between 55 and state pension age. As you can see there are a number of additional financial planning issues to consider for co-habiting individuals compared to married couples. It is therefore important for such individuals to arrange their affairs as efficiently as possible to take advantage of the tax allowances and thresholds available and also to prevent any unwelcome consequences should the worst happen.
Please feel free to contact us for further advice or guidance on any of the issues raised above.
The Financial Conduct Authority does not regulate Will writing and taxation and trust advice
The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future