Cohabiting Couples “Second Class Citizens” When It Comes To Tax Rights

First comes love, then comes marriage, then come the couple with a baby in the baby carriage.

But times change, and contrary to the childhood rhyme, the reality is that in today’s modern world people take many different routes towards creating a family.

However, cohabiting couples could be leaving themselves open to financial complications, according to the experts.

Gordon Andrews, tax expert at Quilter, has warned that couples who live together without getting married or entering into a civil partnership, are “living as second class citizens when it comes to tax rights”, and that the rise of such families increases pressure on the government to consider who benefits from inheritance and tax rights.

The warning comes as new population estimates from the Office for National Statistics reveal there are nearly six million cohabiting couples in Britain.

Andrews said:  “Once again the steadily-increasing trend of people choosing to cohabit shows no signs of abating. In 2017, one in eight people aged 16 years and over in England and Wales are cohabiting, which continues a 15-year increasing trend.

“These figures serve to illustrate a divergence from behaviours of the past where people didn’t live together until they were married. Although this is no bad thing, it does mean that 4.7m people who are living as a couple but have never married or civil partnered do not enjoy the same rights as spouses on death or the same financial protections a married couple with children. They are effectively living as second class citizens when it comes to tax rights.

“However, there is some indication that historic legislation that doesn’t fit with modern behaviours is finally starting to change. Just last month, a Supreme Court’s landmark judgement opened the door to heterosexual couples being able to enter into a civil partnership, no longer making traditional marriage the only option. This opens up more avenues for those cohabiting, to access the rights associated with civil partnerships and marriages.

“Judgements like these increase the pressure on the government to carefully look at who deserves the inheritance and tax rights that marriage and partnerships involve. What needs to be considered is policy that affords rights to people who live together for an extended period of time so they too are protected even without entering into a civil partnership.”

Earlier this year, Royal London called for cohabiting couples to receive the same tax treatment as those who are married or in civil partnerships.

The insurer  demanded the change in its response to a government review of inheritance tax, because cohabiting couples do not benefit from a variety of measures enjoyed by those who are married or in civil partnerships.

Benefits include passing estates to one another tax-free on death, and transferring any unused part of an inheritance tax nil rate band – currently worth £325,000 – to one another on death.

Unlike married couples and those in civil partnerships, cohabiting couples also cannot transfer any unused portion of the recently introduced residential nil rate band to one another on death.

Helen Morrissey, personal finance specialist at Royal London, said: “Cohabiting couples can remain together long term, raise children together and share assets.

“Many cohabiting couples believe that after a certain amount of time cohabitees achieve some kind of ‘common law marriage’ status whereby they attain a similar level of rights to those who are married or in civil partnerships.

“However, this is not the case and a surviving partner can find themselves with a sizeable IHT bill when their partner dies. The time has come to bring these rules into the 21st century and recognise that not everyone wishes to marry.”

5-ways rights differ for married and cohabiting couples:

• A married partner will inherit all or some of the estate when their partner dies even if no will has been left. However, if one cohabiting partner dies without leaving a will, the surviving partner will not automatically inherit anything – unless the couple jointly own the property.
• An unmarried partner who stays at home to care for children cannot make any claims in their own right for property, maintenance or pension-sharing.
• Cohabiting partners also have no access to a partner’s bank account if they die – whereas married couples may be allowed to withdraw the balance providing the amount is small.
• Married partners have a legal duty to support each other whereas cohabiting couples are not legally obliged to support each other financially.
• All married partners have the right to live in the “matrimonial home”. However, if you are the unmarried partner of a tenant, you have no rights to stay in the accommodation if you are asked to leave.