UK: From Cradle to Grave: Living Together

In the first bulletin in this series,we dealt with some of the issues faced by individuals in the early stages of adult life. In this bulletin,we discuss cohabitation issues which affect all couples whether married, unmarried or, after 6th December 2005, registered under the Civil Partnership Act¹.These issues include buying a house together and the associated tax benefits and tax burdens.

How should the property be held? If the title to the property is registered in a couple’s joint names, they will each be the legal owner of the property. That means that both have the legal right to live in the property and a financial interest in the value of the property. However, it is important to note that a property registered in joint names can be owned as "joint tenants" or as "tenants in common".

Joint tenants each own all of the property. If one party dies, the property passes automatically to the survivor. Wills (or the intestacy provisions) cannot override this right of survivorship. Many married couples choose to buy a property as joint tenants to ensure that the survivor of them inherits the property automatically.

Joint tenancies can be severed to create a tenancy in common, should both owners be in agreement. Severance is sometimes used to effect inheritance tax planning.

Tenants in common, on the other hand, each have a distinct share in the property. Where there are two owners, unless it is agreed that the shares will not be equal, each will be presumed to have a half share; if there are three owners each will hold a third, and so on. It is possible to specify in a declaration of trust (see below) what proportion of a property is held by each owner. The share is often, but not always, reflective of financial contribution. Tenants in common are entitled to their proportionate percentage of the sale proceeds on a sale of the property. On death, their share of the property will form part of his or her estate and does not pass to the other owners of the property by survivorship. A tenancy in common will be dealt with under a person’s Will or under the rules of intestacy.

The intestacy rules, generally speaking, favour the deceased person’s immediate family. This means that, for a couple who are neither married nor registered as Civil Partners, the surviving partner may receive nothing. It is imperative, therefore, that unmarried partners and couples who are not registered Civil Partners and want to make sure that their estate benefits their partners on death, should make a will.

Note that registration as a Civil Partnership will revoke an existing will unless the will was made in anticipation of forming the partnership. Consequently, couples planning to register their partnerships should arrange for new wills to be drawn up as soon as possible. Failure to do so may leave civil partners intestate. This is similar to the provisions applying to married couples: marriage revokes a will unless that will is made in contemplation of that marriage.

Shared property without joint investment: married couples; Civil Partners; and co-habitees

When property is registered with the Land Registry in the name of one person, that person will be the legal owner of the property and will have a legal right to occupy the property. The spouse or partner living with the legal owner of the property has no strict legal rights in relation to the property.

In certain circumstances, a non-owning spouse occupying a property may be able to apply for an occupation order under the Family Law Act 1996. A non-owning spouse or partner may also be able to argue that he or she has a "beneficial interest" in the property, and may therefore be entitled to a share of the property. If the non-owning partner has made a payment towards the purchase of the property (for example by contributing the deposit or by contributing to mortgage payments), it may be possible to establish a financial claim. The court can also order, though does so only occasionally, that the property be sold immediately in order to pay the partner his or her share in its equity. The court is most likely to refuse to make such an order if satisfied that the home was bought as a home for the family: generally speaking, any application for the sale of the home, prior to the children reaching 16 or 18, will be refused.

If an agreement has been entered into, or an understanding has been relied upon that the property was to be shared by the couple, and one partner had relied on that agreement to their detriment or significantly altered their position in reliance upon that agreement, the court may decide that the partner who is detrimentally affected is entitled to some financial benefit from the property. Such an agreement need not necessarily be in writing as the court will consider improvements made to the property since the time of the alleged agreement, and/or who has been looking after the family living at the property. A potential interest in a property can be registered (at the Land Registry) on its title as a caution.

Cohabitation agreements

A "cohabitation agreement" or a "living together agreement" can be drawn up for un-married couples. These deal with day-to-day shared costs, namely:

• the payment of household expenses;
• how purchases for the home are to be owned / shared; and
• credit cards payments and loans.

Such agreements are primarily a practical mechanism for everyday life. However, they can also deal with, for example, how the house and furniture should be divided were the relationship to end. Although these agreements do not have a clear status in law, a court will generally follow them if they produce a fair result for both partners, and if both partners were honest with each other about their finances at the start. A court is more likely to uphold a cohabitation agreement where both partners took independent legal advice before and during the formation of the agreement.

Declarations of trust

A "declaration of trust" can set out not only the proportions in which the property is owned, but also a couple’s respective responsibilities, for example, payment of bills or mortgage repayments. The declaration can also provide a framework for co-owners to formalise their respective shares or act as a safety net in the event of withdrawal from the co-ownership arrangement. Provided the declaration is properly drafted, it will be legally binding in the same manner as any legal contract between two parties.

Tax benefits and burdens

Under the CPA, registered Civil Partners will be treated in an identical fashion to married couples for tax purposes. This means that:

• spouses and Civil Partners benefit from the Inheritance Tax exemption in respect of lifetime gifts between them and on property passing from one to another on death. This allows for tax planning with two nil rate bands which, at current rates, could afford a tax saving of £110,000;
• disposals of assets between spouses and between Civil Partners takes place on a no-gain, no-loss basis and do not therefore attract Capital Gains Tax ("CGT"). Disposals of assets between an unmarried couple are subject to CGT;
• whilst a married couple and Civil Partners share one principal private residence relief ("PPR") between them, an unmarried couple can have one home each and can both claim PPR, subject to the fulfillment of certain criteria. Before marriage or registration, couples owning more than one property should consider selling PPR property, or transferring it into trust to lift its base value to market value at the time of the transfer.