The Myth of Common Law Marriage
March 9th, 2011
It is a fact that the number of people choosing to marry has declined steadily over recent decades – the most recent available data from the Office of National Statistic shows that, although marriages increased between 2002 and 2004 this was subsequently followed by a fall up to 2007. The provisional figures for 2008 of around 232,990 represent the lowest numbers of marriages in England & Wales since 1895*
One of the great modern myths is that unmarried couples, after living together for a number of years, become ‘common law’ spouses and have similar rights to married couples, but unfortunately this is simply not the case – In the eyes of the law they are treated as two individuals. So what does this mean in terms of your finances?
Making a will is even more essential for unmarried couples – This is because if your partner dies without a will, under the rules of intestacy, an unmarried partner is entitled to nothing. If you have children the deceased’s assets will pass to them when they are 18 but otherwise they will pass to family members in a particular order of priority (e.g. – In England & Wales the order is parents, then brothers/sisters (or their children), then more remote relatives). It is important to point out that the intestacy rules are different in Scotland and Northern Ireland.
Therefore the consequences of not making a will are more severe than for married couples – In England & Wales, assuming a couple had no children, a spouse would at least receive all personal chattels, £450,000 absolutely (£250,000 where there are children), plus half the residue (a life interest in half the residue where there are children). A co-habiting partner would have no such legal entitlements in the event of intestacy.
Capital Gains Tax
Unmarried couples are unable to take advantage of some of the reliefs and exemptions available to married individuals – The most notable is that transfers of assets between unmarried individuals will count as a disposal of the asset and potentially trigger a liability to Capital Gains Tax (CGT) for the transferor. Again, in contrast, married couples can transfer assets between them without triggering an immediate disposal for Capital Gains Tax purposes
Inheritance Tax is charged at 40% on estates valued above the ‘nil rate band’ (currently £325,000). Married couples are fortunate, however, in that they benefit from an exemption from Inheritance Tax (IHT) on transfers of assets (whether these are transferred whilst they are still alive or on death) – This means a husband and wife can currently leave their entire estates to each other free of IHT regardless of the amount involved.
In addition, where the second spouse dies after 9 October 2007 their personal representatives can claim any ‘nil rate band’ which was not used on the death of the first spouse to die – Currently, married couples can therefore leave up to £650,000 to their wider beneficiaries without any liability to IHT arising.
Unfortunately unmarried couples do not benefit from any similar exemptions – This means that IHT would be charged on any assets left by one partner to the other on death if they exceed £325,000.
It is also important to be aware of the implications for an unmarried partner in terms of pension provision as scheme rules may include provision for spouse’s/dependent’s pension to be paid in the event of the member’s death but clearly this definition may not necessarily extend to an unmarried partner. Legislation does permit schemes to pay a “dependents pension” where, in the opinion of the scheme administrator, an individual was financially dependant on the member or in a “financial relationship of mutual dependence” but it is important to check the rules for any given scheme.
In addition, it is also important to complete an “expression of wishes” form if you want to ensure that the scheme administrators / trustees of any unvested pension schemes pay any death benefits to your partner. In the absence of such a document the trustees are likely to simply pay the proceeds to your estate, and if you have no will then the proceeds will pass under the intestacy rules (as previously mentioned above)
Unmarried couples should consider writing life policies they hold in trust for two reasons. Firstly, a trust ensures that any proceeds from such policies are paid to their partner (or other intended beneficiary) and secondly that the proceeds do not form part of the estate for Inheritance tax purposes. The use of trusts will not be appropriate in all situations, however, and advice is therefore essential.
As you can see there are a number of areas of financial planning where unmarried couples experience a disadvantage compared to married individuals.
Although we have covered some financial planning issues it also worth remembering that co-habiting unmarried partners also do not have the same rights in the event of a relationship breaking down, regardless of how long they have lived together. Despite a series of formal recommendations to extend the rights of unmarried couples outlined by the Law Commission in a 2007 report the Government has so far not acted to change the status quo.
If the above issues affect you then you should consider seeking advice to ensure your financial affairs are in the best order possible.
* Source: Office for National Statistics
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.