Unmarried couples beware: tax and legal traps

Unmarried couples beware: tax and legal traps

It has long been accepted that the law relating to unmarried couples is, at the very least unfair. As stated in a report by the Law Commission in 2007: “It is complex, uncertain, expensive to rely on and, as it was not designed for family circumstances, often gives rise to outcomes that are unjust”.

We are often approached by couples who have chosen not to marry, for whatever reason, but who in every other way are a family unit just like any other married family and whose main objective is often to make provision for each other and their children in the most tax efficient way.

Unfortunately, in terms of long-term estate planning and specifically estate preservation for their children, these couples are at great disadvantage. Especially regarding Inheritance tax allowances and general rights to a partner’s estate.

Here are the most common scenarios we are asked to advise on:

1.  No automatic right to inherit partner’s estate on death

When a married spouse or civil partner passes away, their spouse has the right to inherit at least part of their spouse’s estate (depending on size and whether there are children) and/or an automatic right to bring a claim for adequate or reasonable provision under the Inheritance (Provision for Family and Dependants Act) 1975;

An unmarried partner is not automatically entitled to any of their deceased partner’s estate and their entitlement to bring a claim against their partner’s estate is usually limited to their basic maintenance needs which almost always a much lower level of provision than a spouse.

How can unmarried couples ensure they look after each other?

Clarify your beneficial interests in the property/family home

If the property is owned in a sole name: the legal owner can prepare a declaration of trust giving their partner a right of occupation in the property and/or the right to a share in the equity of the property. Ideally this should be accompanied by an appropriately drafted Will, taking into account, not only your wish to look after each other but also any inheritance tax considerations.
If the property is owned in joint names, there is usually less risk to the surviving partner, although if the shares contributed to the property were unequal, it may be wise to prepare a declaration of trust clarifying which percentage each owner is entitled to.

In either case, if either partner has children from a previous relationship, it is important to prepare a Will which is future-proof and strikes a balance between looking after the surviving partner and preserving your share of the property for the children.

2. No automatic rights to each other’s assets when the relationship ends

Unlike a married couple divorces, the Court has very wide discretion and powers to re-arrange property and other assets, as well as the couple’s incomes and pensions in order to achieve fairness.
Unfortunately, there are no such powers in relation to unmarried couples. The only alternatives available to an unmarried cohabitant who feels they have been left in a financially unfair situation involve attempting to ascertain a beneficial interest in the property. This will usually only be possible by relying on the law of trusts, which can be very difficult, cumbersome and indeed expensive.

How can unmarried couples prevent unnecessary litigation and being left in a precarious position if they separate?

  • By preparing a declaration of trust in respect of jointly owned property or property which is only in one of their names, as advised above;
  • Prepare a cohabitation agreement

This will help avoid any uncertainty in the event you separate and will involve the couple agreeing which share each of you should have in any joint assets (to include property, bank accounts, investments and any other items), as well as any debt, household bills, credit cards and even who keeps the pet.

3. Inheritance tax disadvantage

Everyone is entitled to an inheritance tax (IHT) allowance of £325,000 which means this is the amount they can pass on to their loved ones on death before IHT becomes payable.

Whereas married couples are able to rely on unlimited spousal exemption when the first spouse dies, this is not available to unmarried couples. This means that an unmarried couple leaving assets to each other and then their children could be faced with two IHT bills, whereas a married couple usually will only have one IHT bill, if the joint estate is over the joint threshold.

Is there a way to help unmarried couples save inheritance tax?
This type of scenario is very case specific, so it is not appropriate to generalise. However we are able to provide bespoke advice on estate planning and wills, often with the clever use of family trusts, which helps unmarried clients achieve a fair balance between adequate provision for their partner and their children whilst fully utilising the tax allowances available to them.

A simple, non-technical way to surpass most of the above traps is of course to get married (which some of our clients have already opted to do). However, we appreciate this is not always an option some couples are willing to consider.

So, if you are unmarried and unsure about the best way to protect yourself and your family, please contact our estate planning experts Alex Livesey and Paul Solomons on 01202 802 807 for an initial no – obligation consultation

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