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Cohabiting couples: Know your rights on tax and other legalities

Cohabiting couples: Know your rights on tax and other legalities
Matt Browning
Written By:
Matt Browning
Posted:
21/06/2024
Updated:
21/06/2024

Nine out of 10 couples lived together before getting married, statistics reveal, and a finance service has urged them to be aware of their rights if they are considering tying the knot.

There were 246,897 marriages in England and Wales in 2022 – 12% more than before the pandemic in 2019.

But as a whole, fewer than half of adults were married or in a civil partnership, while the total number of couples living together has more than doubled since 1996.

There were 3.6 million cohabiting couples noted in the last census in 2021, compared to one-and-a-half million 25 years before.

With a record number of couples sharing a property before tying the knot, Evelyn Partners has broken down the legal rights, tax statuses and inheritance tax motions and rules for you to consider.

‘People need to be aware of how laws treat unmarried couples’

Ben Glassman, financial planning partner at Evelyn Partners, said: “All this suggests that many more couples are spending a long period cohabiting, whether it’s a prelude to marriage or not.

“Even if they intend to get married, people need to be aware of how the law and tax rules treat couples who live together differently to those who are married, with often fewer rights and benefits conferred than they might think.”

Glassman added: “Labour has promised in its manifesto to ‘strengthen the rights and protections available to women in cohabiting couples’ – but it’s not at all clear what this might entail, and efforts by Labour to make material changes here could be fraught with difficulty.

“Those who do get married, meanwhile, can often do themselves a favour by recognising some of the tax advantages that come their way as a result.”

The leading UK wealth management firm outlined the key points to consider.

Legal rights

Unmarried and cohabiting partners are not automatically entitled to any of their partner’s property, financial assets, or belongings if they die intestate unless they can be shown to be jointly owned.

They do have the legal right to claim against their partner’s estate if they’ve been cohabiting for more than two years, but this could be protracted, stressful and expensive – particularly if there are blood relatives of the deceased with a strong claim under intestacy rules.

Writing a will is in some ways the answer to this but that is something very few unmarried couples do: estimates show that while more than half of married couples make a will, among cohabiting partners it is just 26%.

A spouse has an automatic claim to most of their partner’s assets on death, and while this might not be a reason to get married, it is another aspect of the financial security that marriage provides, particularly where one partner holds most of the couple’s wealth.

For some cohabiting couples, the best way to protect their assets is to establish a cohabitation agreement when they decide to move in together. A cohabitation agreement can also be established even if you have been living together for a long time.

Tax

There are several tax benefits to being in a legally recognised relationship that are unfortunately not afforded to cohabiting couples.

Married couples and civil partners can transfer assets such as cash, investments and property between them, without giving rise to any tax liabilities. These “inter-spousal transfers” create numerous tax planning opportunities to maximise the use of two sets of tax allowances.

Married couples can make sure they are using their full £40,000 combined ISA allowances by switching investments or cash as required, without any capital gains tax (CGT) or inheritance tax implications.

A couple can also optimise the use of their personal savings allowances so that they minimise tax paid on interest earned.

Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these have been halved so that only £1,000 of dividends per person can be received tax-free. That halves again to just £500 from 6 April for the new tax year.

Finally, the annual Marriage Allowance is available to couples where one partner is earning less than the tax-free Personal Allowance of £12,570 per annum and the higher-earning partner has earnings between £12,570 and £50,270 (£43,662 in Scotland).

The Marriage Allowance enables those eligible to transfer £1,260 of the lower earner’s annual tax-free Personal Allowance to their spouse or civil partner, creating a tax saving of up to £252 per year.

Inheritance tax exemptions and reliefs

Unmarried couples can pass on assets valued up to £325,000 tax-free upon death (the inheritance tax nil-rate band), but anything above this is potentially subject to 40% inheritance tax.

It is important to note that the inheritance tax bill will have to be settled before probate is granted and the surviving partner may not have the assets outside of the conjugal home to pay this tax liability. So, if a partner is left a share of their jointly owned house that far exceeds this value, they could end up having to sell it to pay the tax – an unwelcome prospect at a time of bereavement.

However, a deceased spouse or civil partner can pass an estate of any worth to the surviving spouse without immediate tax consequences. Furthermore, any inheritance tax nil-rate band that is unused by the deceased can be passed on to the spouse for their use in the future – creating a potential nil-rate band of £650,000 for the survivor.

Furthermore, the Residence Nil Rate Band (RNRB) can also be passed between married spouses to enable them to potentially claim a further inheritance tax exemption on the value of the family home, enabling married couples to pass on greater amounts of assets tax efficiently where there are children. This means that a married couple could potentially pass on an estate of up to £1m tax-free.

Marriage also has potential benefits when it comes to making gifts to your loved one during your lifetime. Where an individual makes a gift of capital or assets to another individual, over the value of their £3,000 annual gift allowance, during their lifetime, it may be classed as a Potentially Exempt Transfer (PET) and, should death occur within seven years from the date of the gift, the beneficiary may be liable to inheritance tax.

However, gifts between spouses or civil partners are not PETs – they are ignored for inheritance tax purposes altogether.  Also, a married couple can gift to others up to £6,000 per annum without the gifts being considered as a PET.

As only very rarely are income and savings split equally between spouses, the Government allows a surviving spouse to effectively inherit the ISA savings of their deceased partner and maintain their tax-efficient ISA status.

The surviving partner will receive an extra ISA allowance known as an additional permitted subscription. This is equal to the value of the deceased’s ISA holdings at the date of death and is in addition to the surviving person’s own annual ISA allowance. This is not permitted between any other individuals.