Best of FT Money 2017: Why I got married — for tax reasons
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By most measures I think my partner and I have done all right. We’ve been together for 20 years. We have two strapping, overgrown teenagers, two dogs and relatively successful careers. But we lack that one crucial piece of paper. A marriage certificate.
I’ll freely admit that as a raging atheist I’ve never seen the point. I accept the patchy evidence that marriage helps build cohesion in society, but I’ve always regarded with liberal suspicion the moralists who argue that it is the only true evidence of a partnership.
I’m also of an age where nieces and nephews in their twenties and thirties are getting married in impossibly lavish circumstances, adding to their debt pile so they can have the classical music trio serenading them up the aisle or the chocolate fountain bubbling away at the reception.
And yet on a rather cool morning in early May, my partner and I found ourselves giddily wandering up a quiet street in downtown Southampton on our way to get married. What happened? What went wrong? All I could think as I stumbled into the homely registry office was: “What a sellout.”
Why, you might ask, had we waited 20 years to get married? The answer is that we made a mistake: we thought we were safe as common-law partners. Instead, it has become gradually clear to us that we cannot look after one another financially — let alone our children — without attempting a series of convoluted and legally questionable “workarounds” that mimic the basic protections any married couple take for granted.
Time to tie the knot
I blame the Greeks and Romans for lulling us into a false sense of security. In these ancient civilisations, marriages were private agreements between individuals and families. Then along came the great religions of our modern age, with their accompanying moralistic interference in the legal system. First, the Catholic Church banned “clandestine” marriages. Then, under the influence of the Church of England, the UK government abolished common-law marriages in the Marriage Act of 1753.
Though common-law marriages continue to exist in some countries — in the US they can be contracted in states such as Texas and Utah as well as under military law — we Europeans, usually pioneers in secularism, have gone the other way. Nearly all European jurisdictions have long since abolished “marriage by habit and repute”.
There is, though, some variation within the UK. In Scotland, cohabitants may make limited claims against each other either when their relationship breaks down or on the death of a partner. In Northern Ireland, cohabitants also have legal protection in some areas.
The problem is the law in England and Wales, which is admirably clear: there is no such thing as a common-law marriage. To be fair, the government ran a big campaign (One Plus One) a while ago to dismiss the myth of common-law protection, but the message failed to get through: a YouGov survey commissioned by law firm Mills & Reeve found that more than one-third (35 per cent) of more than 1,000 cohabiting adults either believed they had the same rights as married couples or those in civil partnerships, or they did not know. A further 35 per cent were unaware that a property owned as joint tenants will typically be split 50/50, regardless of how much each party contributed. I certainly don’t remember the campaign and I’m a journalist.
The rise of cohabiting outside marriage
The law needs to be made clear, because more of us are living in these (non-existent) common-law relationships. In the two decades to 2016 the number of “cohabiting couple” families more than doubled, from about 1.5m in 1996 to 3.2m last year. The proportion of unmarried, “cohabiting couple” families has risen over the same period from 10 to 20 per cent. Many have children: the number of dependent children in these households has more than doubled in 20 years to just over 2m.
For us, having children — stroppy teenagers in our case — was a consideration but the key was growing that little bit older as well as that little bit wealthier.
On the subject of assets and ageing, the law is painfully clear. If one partner dies without leaving a will, the surviving partner will not automatically inherit anything unless the couple owned property jointly. Under the laws of intestacy, an unmarried partner is entitled only to jointly owned assets. If the couple have children, the estate of the deceased will pass to them when they are 18. If there are no children, the estate will pass to the deceased’s closest relatives — parents, brothers, sisters — but never to the surviving partner.
One point is that cohabitants’ rights are governed by the law of trusts, especially those relating to assets such as a property. The rules governing trusts, property and families are a mixture of the sensible and the harsh. The good news, for instance, is that couples can specify the form of ownership they prefer when they buy property, or by recording their wishes in writing at any time.
The caveat is that if no express declaration is made, the position on, for instance, property will depend on whether it is registered in joint names or one sole name. If the former, there is a presumption that the parties intended equal ownership. If the latter, the presumption is that the parties intended that person to own the property outright.
This can have chilling ramifications for partners who believe their relationship affords them some legal protection in the family home. If your partner is the sole owner, you may have no rights to remain there if you are asked to leave. There is an echo of this legal intransigence when it comes to rented properties. If you are the unmarried partner of a tenant, whether in private or social housing accommodation, you will usually have no rights to stay if the tenant asks you to leave.
Real pain is felt when it comes to taxes, especially inheritance tax (IHT). A married person or civil partner who leaves everything to a spouse or partner pays no IHT, but no such exemption applies to cohabiting couples. That means IHT will need to be paid if the value of your estate adds up to more than £325,000. Anything left to an unmarried partner above this “nil rate band” is taxed at 40 per cent.
There is some wriggle room. If you have lived together “as man and wife” for at least two years, or if you can show that you were financially dependent on your partner, you can make a claim for a financial settlement even if you were not a beneficiary of the will. That means you can make a claim even if your name is not on the title deeds. These are dealt with via civil proceedings under the Trust of Land and Appointment of Trustees Act 1996.
But the injustice of this frankly archaic legal regime goes beyond homes and into the realms of bank accounts and pensions. If you don’t have a will — and don’t set up a contract specifying how your assets are to be shared — a person will have no automatic right to the couple’s combined wealth if they split up or their partner dies. If the savings and investments are owned jointly then the cohabitant will only be entitled to take back what they contributed during the relationship, and the courts will want proof of just how much each party paid in. A will is crucial in all cases: if one partner dies and has not left a will, their savings and investments will go to their next of kin.
The rules on state benefits are slightly more sympathetic to unmarried couples. For means-tested benefits and tax credits the unit of claim is the “family”, which includes the claimant and their husband, wife or civil partner, or someone they live with as husband, wife or civil partner. There’s a sting in the tail, though. Contributory benefits do not recognise unmarried couples, so a cohabiting partner will not be entitled to bereavement allowance or a state pension based on the former partner’s national insurance contributions.
On private pensions, the principle is still that an unmarried partner does not have an automatic right to a pension pot. But personal pensions can be arranged so that they give cover to whomever the scheme beneficiary selects. Big occupational benefit schemes are happy to help with this — with the proviso that the beneficiary must fill out a nomination form making their wishes clear.
One other practical consideration: 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. But it does depend on the scheme’s particulars, so you need to check.
Time for reform
The complexity of arrangements for unmarried couples suggests the law is not fit for purpose. But it doesn’t have to be this way. Other European countries handle this situation better. In France there’s been a Pacte Civil de Solidarité (Pacs) system since 1999 for opposite sex couples, in effect extending civil partnership rules to non-gay unmarried couples. Since its enactment, more than 1.5m couples have become “Pacsed”. Malta is also about to recognise unmarried couples through three distinctive forms of cohabitation arrangement: de facto, contractual and unilaterally declared cohabitation.
It would be nice for change to come to the UK, yet the evidence is that recent governments do not regard reform as a priority. Despite all our distrust of the law around marriage, I fear my wife and I will be not be the last couple to feel they have no choice other than to capitulate and tie the knot.
What’s mine is yours?
If a couple decides to live together without getting married or choosing a civil partnership, is there anything they can do to protect assets and pension income in the event of a split or the death of one partner? The short answer is quite a lot, but patience is required.
First, consider drawing up a “cohabitation contract”, which outlines each partner’s rights and obligations towards each other. This will specify which assets belong to whom and what happens to them should they have to be divided.
Doubt remains, however, over how much legal force these cohabitation contracts have. Advicenow, a legal information site, said courts will usually follow them as long as what partners agreed was fair and they were both honest about their finances when making the agreement.
“If you want to ensure it is binding, take your completed agreement to a solicitor and ask them to write it as a legal ‘deed’,” Advicenow says.
When it comes to the family home, how you register any purchase of your house makes a big difference. If you owned your home as “joint tenants”, you will automatically continue to own the entire home if your partner dies. If you choose to register as “tenants in common”, you can own the property in any proportions you wish.
Cohabitees purchasing a property under these rules should draw up a will to ensure their share of the property is passed on to the person they wish. But be aware of some intricacies within the joint tenants rule: the law presumes that they intended to hold the property 50-50. This means:
● You cannot force your partner to sell the home if you decide to leave, unless you apply for a court order;
● Even if you contributed most of the costs of buying the home, you would normally only be entitled to a half share unless you have agreed otherwise;
● If your partner walks out on you, you are likely to be liable for the full amount of any mortgage payments.
When it comes to inheritance tax there is much less room for manoeuvre if you are unmarried. Anything above £325,000 in gains will be liable for IHT, although there has been a recent extension of the nil-rate IHT band for property which could push this level higher in the next few years.
One practical point is to equalise your estates: make sure that if you have assets worth £600,000, you each have specified assets worth £300,000.
Finally, if one bank account is used jointly by the couple, make sure it is included in a cohabitation agreement. This ensures both partners will have equal access to the money if a death occurs.
David Stevenson writes FT Money’s Adventurous Investor column
The growth of cohabiting
Smack bang in the middle of the wedding season, it seems impolite to point out that marriage could be heading for extinction. Yet this is exactly what appears to be happening all over the world, from Australia to Egypt, writes Federica Cocco.
In the UK things started to change after 1972, when the marriage rate peaked. That year, 80 out of every 1,000 adult men were celebrating their wedding. For women, it was 60 out of 1,000.
Since then the institution has been in a state of almost unbroken decline: the latest corresponding rate is 23 men and 21 women out of 1,000.
At the same time, the number of cohabiting couples has more than doubled, from 1.5m in 1996 to 3.3m now. Yet these couples have the same rights as simple flatmates.
The Law Commission has asked for a change in the system so that unmarried couples with children or those who had spent a significant period of their lives together would be entitled to financial relief should their relationships end. “Awards would be based solely on the contributions each partner made to the relationship and couples that wished to opt out of the scheme could do so,” it said. So far, it hasn’t been successful.
The government, however, has pushed for couples to tie the knot, through campaigns and tax credits. When former prime minister David Cameron introduced the marriage allowance, for example, he said he did so to send a signal that “marriage is the best family structure for children”.
This policy raises a series of questions. Taxes are generally levied according to the needs of society and the means of individuals to pay, with notable exceptions such as VAT. Those with the greatest means pay more because they have more, and take less out of society because they need less.
But tax breaks for those who are married — implying higher taxes for single people and cohabitants — reverse that “progressive” principle. Here, tax credits are no longer determined by means or need, but as a reward for a lifestyle or moral choice. The question is: should taxation be used to manipulate society into a shape the government desires?
There is also little sign that the overall aim — to boost the attractions of marriage as a structure in which to bring up children — is working. Forty per cent of the UK’s cohabiting couples have dependent children, up from 37 per cent in 1996. Among married couples, the proportion having dependent children has dropped from 41 to 37 per cent over the period.
Statistics bear out the claim that cohabiting couples are more likely to break up than married couples. According to the Marriage Foundation, a pro-marriage think-tank, 5.3 per cent of unmarried couples split up in 2015, compared with 1.3 per cent of married couples. Cohabiting parents account for 20.7 per cent of couples and 51.4 per cent of annual family breakdown.
This is corroborated by the 2010 Millennium Cohort Study, which found that about 27 per cent of couples who were cohabiting when their child was born had separated by the time the child had reached the age of 5, compared with 9 per cent of couples who were married when their child was born.
But how much of a role does cohabitation play in couples splitting up? According to the Institute for Fiscal Studies, those who choose to get married and those who decide to cohabit have very different traits: married parents are more likely to have religious beliefs and to have had parents who remained married themselves. They are more likely to own their own home and to have had a planned pregnancy.
One group of people is going against the cohabitation trend: the over-40s. People are increasingly choosing to marry for the first time after they reach middle age. Reasons may include women choosing to have children later in life or the fact that older people are on average wealthier — and wealth has been noted as a strong indicator of marriage rates.
It is also likely that, as they enter their 40s, people start thinking more about protecting their partners and their assets in old age. There is no evidence to show that tax plays a part in this decision — but the data do suggest cultural and social mores are stronger drivers than government policy when it comes to influencing behaviour.
Federica Cocco is an FT statistics journalist
This article was first published June 9 2017
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