A growing number of unmarried couples are cohabiting, buying homes, and raising families without the legal protections afforded by marriage. However, financial experts caution that these couples face significant risks, including the potential loss of assets, lack of inheritance rights, and substantial tax bills, as current laws in England and Wales do not recognize common-law marriage.

Official data indicates that approximately 6.5 million people in the UK cohabit, and over half of children are born outside of wedlock. Despite these realities, many cohabiting couples are unaware of the precariousness of their financial standing should their relationship end or one partner die. Cases have emerged where mothers have been forced out of family homes, surviving partners have been left penniless, and inheritances have been lost.

Sarah Coles, head of personal finance at AJ Bell, emphasizes that without marriage, partners have no automatic legal, financial, or inheritance rights, regardless of the relationship's duration. If an unmarried partner dies without a will, intestacy rules dictate that the surviving partner receives nothing. If a home is solely in the deceased's name, a child of the deceased could legally evict the surviving partner. While a claim against the partner's estate is possible after two years of cohabitation, such legal battles can be protracted, stressful, and expensive.

Furthermore, unmarried couples cannot claim against an ex-partner's pension upon separation, potentially leaving them with insufficient retirement savings. In contrast, married couples have defined options for pension sharing during divorce. Bereavement benefits and spousal maintenance are also not automatically available to unmarried partners.

Proposed Reforms and Inheritance Tax Concerns

The UK government has acknowledged that cohabitation law has not kept pace with modern family structures and has proposed reforms. These changes, which were subject to public consultation, aim to provide a safety net for couples. Proposed measures include granting cohabiting couples intestacy rights similar to spouses when a partner dies without a will. For couples separating, reforms may allow for claims on assets, including a share in the sale of a home owned by one partner.

However, these reforms are intended to preserve distinctions from marriage. Unlike divorce, where assets are often split equally, the initial assumption under the proposed cohabitation reforms would be that each person keeps what they legally own. Courts would only intervene to meet essential needs, such as those of a parent who sacrificed their career for childcare.

One significant financial hurdle for unmarried couples remains inheritance tax (IHT). Spouses benefit from substantial IHT allowances, allowing them to pass wealth to each other tax-free and share unused allowances. For example, a married couple could potentially pass on up to £1 million tax-free. Unmarried couples do not receive these benefits, meaning substantial IHT bills can arise. Comedian Ricky Gervais recently announced his intention to marry his partner of 44 years specifically to avoid a significant IHT liability on his fortune. Experts calculate that without marriage, his partner could face a tax bill of over £56 million.

Even for couples with more modest assets, IHT can be a major issue. For instance, if one partner in a couple with assets valued around £850,000 dies, leaving their share to the surviving partner who is not married, a substantial IHT bill could be incurred. Had they been married, the total IHT paid would be significantly lower.

Risks and Protective Measures

There are also concerns that the proposed reforms could inadvertently lead to assets falling into unintended hands. Gifts made to children, for example, could potentially be claimed by their ex-partners if the couple splits up. This could also complicate inheritance for children from previous relationships.

Financial experts advise several steps for cohabiting couples to protect their wealth:

  • Write a Will: A will ensures that assets are distributed according to the individual's wishes, preventing unintended beneficiaries from inheriting.
  • Cohabitation Agreement: These legally binding documents can outline ownership of assets and how joint property would be divided in case of a split. Legal advice is recommended for these agreements.
  • Nominate Pension Beneficiaries: Couples should nominate their partner as a beneficiary for any unused pension savings.
  • Minimize IHT: Strategies include gifting assets more than seven years before death or making regular gifts out of surplus income.
  • Marriage: Tying the knot remains the most straightforward way to secure significant inheritance tax advantages and legal protections.

While reforms are underway, couples are urged to understand their current legal standing and take proactive steps to safeguard their financial futures.