Breaking up is hard to do, and not just the heartache

MARRIAGE rates have hit a record low as more couples choose to cohabit, but this can end in a splitting headache if your finances become more closely entwined than you do.

Things could get very messy when you break up, or if one of you dies, because cohabitees have fewer legal rights than married couples or civil partners. Planning is important as two thirds of couples under 30 move in without getting married, and older people are also following suit.

One in five couples in their 40s and one in 10 couples in their 60s now cohabit, official figures show.

Social values may be changing but make sure you do not pay the price by assuming you have more rights than you really do.

THE SPLITTING HEADACHES

Couples who move in together need to understand the additional financial risks, said Sarah Coles, personal finance analyst at Hargreaves Lansdown: “For example, if you split up and the home is in the other person’s name, you may have no right to a share.”

This can cut both ways. If you are the property owner, your ex may claim an interest if they paid bills or helped with home improvements. “Couples who move in together may have made a bigger commitment than they appreciate,” she said.

Things get even more complicated if cohabitees have children together. If one partner sacrifices their career to raise children they have no right to spousal maintenance following a split. “Similarly, if one has a sizeable pension and the other has nothing, there is no compulsion to share,” Coles said.

As women typically raise children and have lower incomes and pensions as a result, they tend to be the losers. However, men can lose out too. If an unmarried couple have children they must make sure the father is on the birth certificate, otherwise he will not have an automatic right to care for them if the mother dies.

TAX TROUBLE

Cohabiting also has tax drawbacks as married couples can share assets to take advantage of their income tax, personal savings, dividends and capital gains tax allowances. If unmarried couples share assets, it could trigger a tax bill.

The death of a partner always hurts but if you are unmarried the financial pain could add to the emotional loss.

If your partner dies without a will, you could get nothing. Coles said: “If the home is in their name, you could lose that too, because everything passes to your partner’s children.

“If they have no children, it goes to their parents.”

Some pension schemes do not allow members to leave their pot to an unmarried partner on death. Others will – but only if you complete a “nomination of beneficiaries” form. “Without that, they may get nothing,” Coles said.

Married couples can leave their wealth to their spouse free of inheritance tax (IHT). “Unmarried couples who breach the £325,000 nil-rate IHT band could face a tax bill. Some could even have to sell their home,” Coles said.

Another downside is that you cannot inherit each other’s Isas on death, because a benefit called the additional permitted subscription is available only to married couples and civil partners.

The good news is that you do not have to get married to get protection. “It will help if you make a will, consider owning property as ‘tenants in common’, and put both savings and debt in both names,” she advised.

A cohabitation agreement setting out what happens if you split up might also offer protection.

MAKE ALLOWANCES

The marriage allowance also gives couples a direct incentive to get hitched or become civil partners.

Nearly 1.8 million save up to £252 a year in tax by claiming marriage allowance. Couples are eligible if one partner earns less than the personal allowance of £12,570 and their partner is a basic rate taxpayer.

Claims can be backdated for up to four previous tax years, up to a maximum £1,220.

Julia Rosenbloom, tax partner at Smith & Williamson, said many could now claim for the first time if their income fell during the pandemic: “Look at whether changes in your personal circumstances mean you could now benefit.”

Eligibility may also change after one partner retires and sees their income fall. Royal London expert Clare Moffat said: “It is well worth checking if you could be eligible to claim on gov.uk.”

‘If you split up

and the home is in the other person’s name, you may have no right to

a share’

TALK MONEY TOGETHER

Whatever your marital status, the couples who plan finances together are more likely to stay together, or fare better if they separate. Charles Stanley’s director of financial planning, Alexandra Price, emphasised communication is key, so talk with your partner about money.

Consider setting up a joint bank account for bills and spending, each paying a share. “You might want to maintain your financial independence with the rest of your money, to stay in control of finances.”

Finally, protect again sickness and ill health with life insurance and critical illness cover, Price said. “That way you can continue to look after each other, even if the worst happens.”