Succession planning: considerations for cohabitees – part 2

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In our second blog post of this series we consider the lack of legal recognition for cohabiting couples in the UK, and the associated absence of particular benefits, tax reliefs and statutory protections. In our earlier blog, we examined issues that may arise in succession planning for LGBTQ* families, particularly around outdated legal terminology.    

Confusion around co-habitation

The Office for National Statistics found that in 2019 cohabiting couple families were the second-largest family type in the UK (18.4% of families), second only to married and civil partner families. 

There is a common misconception that cohabiting couples are automatically entitled to the same legal rights as married couples or civil partners on death or the breakdown of the relationship, in respect of shared property, savings and possessions.  This is not the case – and the legal solutions for cohabiting couples to obtain some form of proprietary relief in the event of a relationship breakdown are particularly cumbersome and complex.

The UK Law Commission has recommended the introduction of a new scheme of financial relief for cohabiting couples on separation, based on the contributions made to the relationship by the parties (rather than on the respective financial needs of the parties as in divorce). However, these recommendations have not so far been implemented.

In the absence of any statutory provision, cohabitation agreements can provide a measure of certainty and protection for cohabitees.  These can determine how assets would be shared in the event of a relationship breakdown and detail financial contributions and intentions. Agreements of this type are of increased importance for blended families, where it is not intended that all assets will be shared.  The best solution is often to “front-foot” the difficult conversation and address these possible issues early on in a relationship.

Pension disadvantages

One common area which can create discrepancies for cohabitees is pension provision.  There is a specific exception in the Equality Act 2010 which allows an employer to provide access to benefits or services to persons who are married or in civil partnerships, to the exclusion of those who are not.  After the death of a pension scheme member a pension (or a much more generous pension) may therefore be available to a spouse or civil partner, but not to a cohabitee. 

Where pension schemes do allow benefits for cohabitees there is a framework in place to ensure that they are not discriminated against.   The UK Supreme Court held in 2017 that a provision in a pension scheme that required a cohabiting survivor to have been nominated by her partner before she qualified for a survivor’s pension amounted to discrimination on the basis of marital status and should be disapplied.

Tax reliefs and allowances

Transfers of assets between spouses or civil partners living together are treated as taking place for a consideration that gives rise to no gain and no loss - that is, no charge to capital gains tax arises on such transfers. Cohabitees do not benefit from this relief and also miss out on the income tax marriage allowance, which allows spouses and civil partners to transfer £1,250 of their personal allowance to their husband, wife or civil partner.

The more significant tax relief available to spouses and civil partners which is not available to cohabitees is the spouse exemption from inheritance tax (“IHT”).  If assets in excess of the nil rate band (currently £325,000) are left to a cohabitee, IHT at the rate of 40% will generally be payable.  This can be particularly difficult if the deceased’s estate largely consists of illiquid assets, such as the family home, which would need to be sold in order to pay the IHT.  Meanwhile, spouses and civil partners can leave their entire estate to one another tax free on death, and also transfer any part of their unused nil rate band to their surviving spouse or civil partner. 

Attempts have been made to change the law to provide for IHT relief on death for cohabiting siblings – but these have so far not proved successful and would not in any event assist other cohabitees.  However, following a number of reports, there is speculation that IHT reform may be imminent – an all-party parliamentary group has proposed a radical overhaul of IHT (including a 10% flat rate of IHT on all gifts on death) so the current disadvantage to cohabitees may be addressed in that manner. 

Intestacy provisions

Cohabitees are also left out of the intestacy provisions, making them especially vulnerable if their partner dies without a will.  This is a genuine concern, as it is estimated that over half of UK adults do not have a valid will.  A surviving spouse or civil partner is generally entitled to a statutory legacy of £270,000 (from 6 February 2020) from their deceased’s partners estate, then 50% of the estate if there are surviving issue or the whole estate if there are not.  There is no such provision for cohabitees. 

While surviving cohabitees can currently make a claim against their deceased partner’s estate under the Inheritance (Provision for Family and Dependents) Act 1975, the standard of provision that must be made for cohabitees is lower than that provided for married couples/civil partners – broadly being linked to a ‘maintenance’ requirement instead of a higher ‘reasonableness’ one.  Again, there would also be the additional time, cost and stress associated with an application for provision under this Act which could be avoided with appropriate succession planning through use of a will or family trusts.

Where one cohabitee is looking to provide assets for, or protect assets from, the other, a combination of a cohabitation agreement and a will should provide a significant degree of certainty for both parties.

If you have a question on the above, or would like to learn more, contact BCLP’s Private Client team.

This blog provides a general summary and is for information purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal and tax advice should always be sought before taking or refraining from taking any action.




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