Many people don't realise that unmarried couples are not recognised in law - there is no such thing as a 'common law' spouse. In recent years, there have been two major reports by the Law Commission which recommended giving cohabitants greater rights in the areas of property, intestacy and family provision but the Government has not as yet moved to implement any of these proposals. This means that, if you are in a long-term relationship but not husband and wife or civil partners, you have to plan your financial affairs more carefully than those who are married or in a civil partnership.
The major problem is what happens when one of you dies. Under the laws of intestacy, an unmarried partner is entitled to jointly owned assets only. If the couple have children, the estate of the deceased will pass to them when they are 18. If there are no children, the estate will pass to the deceased's closest relatives - parents, brothers, sisters etc. etc. - but never to the surviving partner.
This makes it absolutely vital that unmarried couples make wills. A will ensures that your property passes to the people whom you wish to benefit on your death - not some second cousin in Australia that you've never even met! As well as dealing with the disposal of your property, you can also use your will to indicate who should be guardian of your children on your death. Making a will is the single most important thing to do. Read the Isis Financial Planners page on wills for more details.
There are other measures you can take to safeguard your partner in the event of your death. Does your employer have a pension scheme? If so, make sure that you have nominated your partner to receive the lump sum 'death in service' benefits. This makes sure that the money goes directly to your partner and (if you die without having made a will) does not pass by the laws of intestacy to your family.
In addition to nominating you partner for the lump sum, check if your pension scheme will pay a survivor's pension to your partner - some will and some won't. It is better to find out where you stand.
If you have a personal pension or stakeholder pension, you can nominate your partner to receive the full value of the accumulated fund on your death. Isis Financial Planners specialises in pensions advice - read our pensions web page.
If you have any life insurance plans to cover your mortgage, make sure that these are put under trust for your partner. If you have children, you are likely to need extra insurance - again, these plans can be written in trust for your partner and the children. Read our life insurance page for more information.
Inheritance tax (IHT) is a major problem for unmarried couples who own substantial assets. Where a husband, wife or civil partner can leave everything to their legal partner without the estate paying a penny of tax (even if the estate is worth millions!), anything left to an unmarried partner over and above the 'nil rate band' - currently £325,000 per person - suffers tax at 40%. Ouch!
Again, you have to be clever and take some trouble in order to minimise the IHT liability. There are two major ways of doing it. One way is to equalise your estates. What this means is that if, between you, you have assets worth £600,000, it is better that these are owned 50:50 rather than one of you owns assets worth £500,000 and the other assets worth £100,000. In this example, if they are owned jointly and one of you dies, there is no IHT to pay, as the deceased's estate is £300,000 - within the £325,000 nil rate band. But if someone owning assets valued at £500,000 dies, the tax bill is £70,000. I am sure that most of us can think of better things to do with £70,000 than to hand it over to the Chancellor Of The Exchequer.
So, if you are buying a second property, it may make sense to put it in joint names. But don't rush out and transfer property you have owned for years into joint names, as that will trigger a capital gains tax charge.
There are two ways of owning property jointly - as tenants in common or as joint tenants. If you are tenants in common, you can own the property in any proportions you wish - not just 50:50 but 60:40, 70:30, 90:10 etc etc. And you can bequeath your share to anyone in your will. If you are joint tenants, however, and one of you dies, the other will inherit the property automatically - you cannot leave it to someone else. But, nevertheless, your share is still liable to inheritance tax.
Some people are not comfortable with the idea of splitting assets with their partners - and that is understandable in light of the lack of legal protection if the couple should separate in the future. An alternative way of protecting your partner from an inheritance tax liability on death is to take out a life insurance policy for the amount of the expected tax bill. The partner in the example above could have taken out a policy on his or her own life with a sum assured of £70,000 and put it under trust so that it would pay that amount direct to the surviving partner in order to pay the tax.
I've just mentioned separation. Nobody likes to think about it when they start a relationship but it can happen and it can be devastating, both emotionally and financially. The law provides little protection for unmarried couples in this situation - there is some protection in terms of rights to the family home but this is a complicated subject and you would need to consult a solicitor specialising in family law about it.
Cohabitation or Living Together Agreements are becoming more common and they are an excellent idea. These set out the way the couple's assets should be divided if they separate. It's better to make an agreement when you are just starting out together rather than in the bitterness of separation.
Or you could just tie the knot. . . . . .
(This content is based on our understanding of the law of England and Wales at March 2016)
To discuss your particular needs, please contact Isis Financial Planners.