Leaving cohabitees behind
It may be time for a fundamental rethink to ensure unmarried couples receive the same benefits and tax breaks as married couples and civil partners, says Matthew Duncan
There are more than three million cohabiting couples in the UK. The days when the majority of families comprised a husband, wife and children are past. Marriage rates are at historic lows, dropping nearly 50 per cent since 1941 when there were 471,000 marriages a year – to just 243,000 in 2016, according to the Office for National Statistics. While society has shifted away from traditional marriage, the tax benefits and exemptions afforded to married couples or those in a civil partnership have not been extended to unmarried couples and their children. The introduction of the Civil Partnership (Opposite-sex Couples) Regulations, which came into force on 2 December 2019, reinforces the position that only those in a legally recognised relationship can benefit from the tax incentives available.
The regulations follow a long legal battle which ended up in the Supreme Court where it was decided that civil partnerships (which have been available to same sex couples since 2005), should be available to everyone. Same sex couples have been allowed to marry in England, Scotland and Wales since 2014. Opposite sex partners can now be legally united in a civil partnership, which gives them rights and financial benefits which are enjoyed by married couples and same sex civil partners. For couples who do not want to get married, a civil partnership can now provide many of the benefits and tax breaks that a husband and wife have long since been able to benefit from. The government has estimated that around 84,000 civil partnership ceremonies could take place this year following the new law that’s now in force. If that is so, it still leaves more than two million cohabiting couples – who are neither married nor in a civil partnership – unable to benefit from the tax incentives and benefits given to those who are.
While many couples who live together share many of the financial and moral obligations as married couples or those in civil partnerships, couples who choose not to marry or now enter into civil partnerships will not enjoy the same legal rights and tax benefits. Four examples particularly illustrate the differences between couples who choose to marry or enter a civil partnership; and those who cohabit.
f someone dies without leaving a will, the intestacy rules will determine how their estate is distributed. If someone who is married or in a civil partnership dies without making a will, those rules will assist them. But they do not provide for a cohabiting partner because unmarried couples do not inherit under these rules. A cohabitee may have to bring a claim under the Inheritance (Provision for Family and Dependants) Act 1975. Even if a surviving cohabitee successfully brings such a claim, there is no guarantee that the outcome will be what the deceased would have wanted. It’s also worth noting that in the case of unmarried couples, claims made under the 1975 Act are limited to maintenance only, which may seem grossly unfair if the couple had lived together for many years.
The wealth of many couples is tied up in their family home. It the home is held in the deceased’s name, the surviving cohabiting partner can often be forced to rely on the laws of equity to claim a right to the property. If the cohabiting couple held the property as tenants in common, this still doesn’t assist because the deceased’s share would pass to their family following the rules of intestacy who, in turn, may choose to sell the property.
But if a cohabiting couple register a civil partnership or marry, the surviving partner would be in a far better position. Where there are no children, the partner would inherit the entire estate. If the couple do have children, the surviving partner will take a statutory legacy of £270,000 on death on or after 6 February 2020 (£250,000 for earlier deaths). The balance is divided equally between the surviving spouse and any children. As legal practitioners, we recognise that relying on the laws of intestacy rather than making a will is unwise.
As the Law Commission consultation paper 231 (published in July 2017) pointed out: “The intestacy rules are a blunt instrument that will not work for many people. Most notably, no provision is made for a person’s cohabitant under the rules. This is obviously a serious issue for the Leaving cohabitees behind. It may be time for a fundamental rethink to ensure unmarried couples receive the same benefits and tax breaks as married couples and civil partners, says Matthew Duncan Tax benefits and exemptions afforded to married couples or those in civil partnerships have not been extended to unmarried couples and their children. many people in England and Wales who live together without being married or in a civil partnership.”
If couples who are married or in a civil partnership do make a will, any gifts between them are exempt from inheritance tax. Cohabiting couples, however, are restricted to the nil rate band of £325,000. Assets valued at more than £325,000 will be taxed at 40 per cent if gifted to a surviving partner. They are also unable to benefit from the transferable nil rate band or the residence nil rate band, which could result in a significant amount of inheritance tax being paid.
CAPITAL GAINS TAX
Where an individual holds an asset with significant inbuilt gains and they wish to sell or give it away, they could give a proportion of the asset to their spouse or civil partner. The receiving spouse or civil partner would receive the asset at the cost it was acquired by their partner. Both partners could then utilise their own annual capital gains tax (CGT) allowances (currently £12,000) to reduce the value of the tax liability when selling or giving the asset away. Cohabitees are not able to take advantage of this tax planning tool. But one area which can potentially benefit cohabitees is if they each own separate properties. While a couple remains unmarried and not in a civil partnership, they may each dispose of their respective properties without a charge to CGT utilising the principal private residence (PPR) relief. In contrast, a married couple or a couple in a civil partnership can only elect for PPR to apply to one property.
PENSIONS AND BENEFITS
Depending on the terms of the pension scheme, while a married partner or a civil partner may be entitled to receive benefits after the death of the policy holder, it’s unlikely similar payments will be available to a cohabitee. Most traditional pension and life policies won’t apply to cohabitants unless letters of wishes or nomination forms have been completed specifically naming their cohabitee. To add insult to injury, surviving cohabitees are not entitled to bereavement support payments, widowed parent’s allowances or bereavement allowances. Bereavement support payments and widowed parent’s allowances are worth nearly £12,000 in the first 18 months of the death of a spouse or civil partner. The introduction of civil partnerships for opposite sex couples will be welcomed by couples who do not want to get married. It will be interesting to see how many couples will register new partnerships. However, for the millions of couples who choose not to either marry or enter into civil partnerships, the tax rules and benefits still disadvantage them. Perhaps the time has come for a fundamental rethink to ensure that unmarried couples and their children receive the same benefits and tax breaks as married couples and couples in a civil partnership.
Matthew Duncan is a partner at Druces druces.com