How couples can protect their financial interests when cohabiting

People who simply live together cannot assume they have the same rights to each other's assets as spouses or civil partners. Michelle McGagh sees how they can protect their financial interests

Love but not marriage: property is one area where cohabiting couples are in danger of losing out (Rex Features)

Contrary to popular belief, it isn't the case that being a common-law spouse provides built-in protection for cohabiting couples – but there are voluntary arrangements that can provide equivalent financial rights.

Recent changes to the intestacy laws, which determine who can inherit an estate if someone dies without a will, make it easier to claim more of the property of a spouse or civil partner. However, despite recommendations from the Law Commission, unmarried, cohabiting couples were not given any more rights to a partner's estate in the event of death.

Resolution, an organisation of lawyers that promotes mediation to solve family problems, is campaigning for increased legal protection for couples who live together. According to the Office for National Statistics, the number of cohabiting couples has almost doubled since 1996 from 1.5 million to 2.9 million in 2012. Stephen Kirwan, managing director at the law firm Nowell Mellor and the head of Resolution's work on reforming cohabitation law, says live-in partners have "almost no rights" – although many mistakenly believe that couples become "common-law spouses" after either two years or sometimes six years.

In order to protect their own interests and ensure a partner is provided for if one dies – or if the relationship breaks up – cohabiting couples should assess each area of their finances, property and childcare arrangements to see what provisions they need to put in place.

Couples can use cohabitation agreements or declaration-of-trust arrangements, which are both legally binding, to determine who owns what assets and who is entitled to what.

The contracts differ slightly. A declaration of trust, sometimes known as a deed of trust, sets out exactly what assets each partner is bringing to the relationship and what happens to the assets should they have to be divided. This contract can set out who pays certain bills and any "extra value" that one partner may have contributed, such as paying for home improvement.

A cohabitation or "living together" agreement typically covers more day-to-day matters such as the way the household is run or other circumstances specific to the relationship.

Mr Kirwan says: "A declaration of trust or cohabitation agreement establishes what your property is and it is binding on execution: it cannot be changed without the consent of both parties.

"A declaration of trust is usually in relation to particular property and a cohabitation agreement can include extra details about paying off debts, joint accounts and financial arrangements around children, such as who pays for school fees."

Property

A home is usually the largest asset a person or couple owns, and for married couples or those in a civil partnership, each person has equal rights to the property no matter who bought it, who pays the mortgage or who maintains it.

For cohabiting couples it is not that straightforward. If the property is owned by one of the couple, it has to be decided whether their partner has an interest in the property – because they contribute to the mortgage, or because they pay for building work, for example. However, if these contributions are not set out in a declaration-of-trust agreement then the partner who does not own the property could find they have no rights to a share of the home if the relationship breaks down.

Similarly, cohabitors buying a home together should make sure they use the right legal structure so the property passes automatically to the surviving partner in the event of death.

Property-purchase contracts can be drawn up as either "joint tenancy" or "tenants in common". Under joint tenancy, both partners own the whole property, meaning that if one person dies, the survivor carries on owning it.

Tenants in common means each partner owns a specific share. Under this arrangement, the share a person has in a property can be left to whoever they choose.

Mr Kirwan warns that cohabitors purchasing a property under tenants-in-common rules should also draw up a will to ensure their share of the property is passed on to the person they wish. "If you are buying [a property] together, it needs to be in joint tenancy if you are making an equal contribution because then the law will see it as equal [ownership]," he says.

Pensions

The introduction of auto-enrolment means more workers are paying into a workplace pension scheme, but unmarried couples do not have an automatic right to the pot of money if their other half dies before or after retirement.

Mr Kirwan says most pension schemes "deal with married couples and not cohabitors". If a person dies before retiring, a spouse or civil partner will be entitled to "death-in-service benefits" from the pension pot, and if the spouse has already retired then a "widow's pension" will be paid to the survivor.

An employee has to nominate who they want to benefit from their pension should they die, but Mr Kirwan says it would depend on the scheme as to whether it would allow non-married couples to nominate a partner.

Savings and investments

Unless savings and investments are included in a cohabitation agreement and a will, a couple will have no automatic right to this wealth if they split up or their partner dies.

If the savings and investments are owned jointly then each cohabitor will only be entitled to take back what they contributed at the end of a relationship, and the courts will want proof of just how much each party paid in.

As with property, if one of the cohabitors dies and has not left a will, their savings and investments will go to their next of kin.

Joint accounts

Michael Gregory, family law specialist at Clarion, warns that an account used jointly by a couple needs to be included in a cohabitation agreement and will to ensure both partners have equal access to the money in the account. This is particularly important in the case of death, as if the account is not put into joint names then "the money will be frozen until the probate is dealt with and then the funds are released", he says.

If the accounts are not held in joint names, it may mean bills are not paid and a surviving partner could be left without any money.

Children

The number of children living in cohabiting-couple families has doubled between 1996 and 2012, from 900,000 to 1.8 million. Mr Gregory says that while cohabitors can claim child maintenance from a former partner, a cohabitation agreement can be used to make other, more extensive financial provision for children and even children from former partners who are not biologically related to both cohabitors but are part of the family. He recommends updating wills to set out who a child should live with if one of the partners dies.

He adds that child arrangement and special guardianship orders can provide confirmation of who a child lives with should a parent die.

Change in the law

Resolution, of which both Mr Kirwan and Mr Gregory are part, is continuing to lobby for changes to the law around cohabitation. However, Mr Gregory says the "political agenda" pushing marriage, with the introduction of tax breaks for married couples and same-sex marriages, means the Government is less keen to make changes to cohabitation laws – although a second reading of a cohabitee rights Bill is expected this year.

Liberal Democrat peer Lord Marks introduced the Bill to give cohabitors similar but not equal rights to married couples last year and the first reading was in October 2013.

"There are clearly more people living together and choosing not to get married or enter into a civil partnership," says Mr Gregory. "We live in a very different society and there needs to be a change. Unfortunately that has not happened yet.

"We have a set of archaic laws that deal with equity and trust and we do not have anything that protects people living together.

"If you have been living together for a period of time," he adds, "then there should be some responsibility and protection."