Coupling up: marriage, civil partnership or cohabitation?
The modern day concept of marriage and relationships is evolving in many cultures around the world. As new trends develop, it is important to be aware of how the legal and financial benefits enjoyed by a married or cohabiting couple compare.
A commonly held belief is that cohabitees are ‘common law’ husband and wife and have the same legal and financial entitlements as a married couple (references to marriage hereafter includes civil partnerships). This belief could not be further from the truth. It can come as a nasty shock to the weaker financial party to find out that despite having lived with their partner for decades, they have few or no financial rights on separation. The position is not guaranteed to improve if the couple have children either.
This contrasts dramatically with a married couple’s positon on divorce. The starting point on divorce is equal division. Non-financial contributions, the length of the marriage and children can be taken into account. This provides a level of legal and financial protection not available to the cohabiting couple. For the wealthier partner, this may seem like a very good reason to avoid marriage but pre-nuptial agreements are now recognised in many countries.
Is marriage less taxing?
Tax breaks are available to married couples in some countries, allowing them to pass assets to each other with no capital gains tax consequences and to transfer income tax allowances. However, marriage can also have tax drawbacks. Married couples may only be entitled to one main residence between them for capital gains tax relief, whereas a cohabiting couple may have one each; a handy perk when property prices accelerate and you are committed for the long term.
Furthermore, the tax benefits a married couple enjoy on death are particularly pronounced. Such reliefs are generally not available to the cohabiting couple.
Till death do us part
The rules on the succession of assets on death are equally harsh for cohabitees. A spouse will receive preferential treatment and be entitled to a proportion of the assets even where there is no will in most jurisdictions. This is not so for the surviving cohabitee who may be faced with little or no entitlement unless they are willing to pursue costly litigation.
Pension benefits on death should also be considered. The succession of a number of pensions (often work related schemes) will rest on whether there is a ‘dependent’ who can continue to receive the deceased’s pension benefits. Spouses automatically have this status. Cohabitees will in some cases, but not all. This will be subject to the terms of the individual pension scheme and can lead to pension benefits passing to children or disappearing altogether.
No standard approach worldwide
Whilst a civil partnership is on an equal footing as marriage under for example the tax laws of the UK, this is not always the case internationally. The USA is a good example of how individual states have different rules. Where assets are held in different jurisdictions, it is essential to know how the rules in each country work.
For most cohabiting couples, with planning, there will be workable solutions to the downsides. Cohabitation agreements are available to couples concerned about their financial exposure on separation. Each party will need independent legal advice to ensure the agreement is legally enforceable.
Where there is a will, there can be a way
For those concerned about what will happen on death, wills can be created to allow the surviving cohabitee to inherit (though note that, in some jurisdictions, forced heirship rules may apply that benefit close relatives and not the surviving cohabitee).
For death and lifetime taxes, it will also pay to look at how assets are held, jointly or individually, and what scope there is to organise assets in a way that will avoid problems later. This can be beneficial to both cohabitees and married couples.
None of these issues will be topics for a romantic candlelit dinner, but obtaining advice on what a relationship structure offers legally and financially will be critical in determining how to plan for the risks and pitfalls that can arise over a life-time.
About the author
Jenny Cutts is a specialist private client lawyer at WedlakeBell. The London law firm forms part of Julius Baer’s open product and service platform.
> If you’re interested in finding out more, please contact us.
What matters to you?
Life, business, investments, aspirations - what matters to you matters to us. This article is part of our ’What matters to you?’ series, in which we have a close look at what lies close to your heart and how wealth planning may help you to achieve your objectives.