Couples who Cohabit - Tom and Jessica's Story
Almost half of cohabiting couples wrongly believe they share the same rights as those who are married, a study for the National Centre for Social Research finds. Living together has 'no general legal status', warns family law professor Anne Barlow.
If a couple do not want to get married, entering into a civil partnership could be a way to leave them financially better off. Find out how in Tom and Jessica’s story below.
Tom, aged 31, and Jessica, 29 have been together for eight years. They are in a committed relationship but neither think that traditional marriage is for them. They live together in a flat Tom bought which is in his name. As well as the property, Tom has £500,000 in cash passed down to him by his grandparents, currently held on deposit.
Recently, his dad passed away suddenly, leaving him with a further £200,000. It has since transpired that his dad’s condition was genetic, leaving Jessica worried about whether she would be looked after in the event Tom also dies suddenly from this condition. Jessica is a nurse with barely any savings and is pregnant with their first child, while Tom earns £190,000 a year as a senior associate at a law firm. As opposite sex couples will soon be able to enter into a civil partnership, they are considering this option in order to receive the same benefits as those married couples receive.
WHY ENTER INTO A CIVIL PARTNERSHIP AS AN ALTERNATIVE TO MARRIAGE?
There are many reasons why a civil partnership could leave a couple financially better off. In the event of Tom dying, it could also help ensure Jessica has as much money as possible to support her and the new baby.
Aside from the funds tied up in Tom’s flat, if he were to die when the couple were not in a civil partnership and wanted to pass his £700,000 estate on to Jessica, it would be above his nil-rate band (currently £325,000). Inheritance tax (IHT) of 40% would be payable on the £375,000 not covered by Tom’s nil-rate band. This would equate to a minimum of £150,000 in tax and would be more when the property is considered. If Tom and Jessica enter into a civil partnership, assets can be passed between the couple free of Inheritance Tax.
THE IMPORTANCE OF WRITING A WILL
Writing a will is vital. If Tom and Jessica decide not to enter into a civil partnership, and if Tom dies without a will after their child is born, all his assets would pass to the new born child and not Jessica.
As the flat is in Tom’s name and would be part of his free estate (assets you can control and bequeath in your will), none of these assets would go to Jessica, unless they were in a civil partnership. Considering all Tom’s assets, there is a significant amount of wealth he could choose to invest; if a couple is in a civil partnership, investments can be switched between the pair, reducing the capital gains tax (CGT) liability when they are sold. Currently, Tom could benefit from a tax-free allowance of £11,700 before CGT is due, although if the couple were in a civil partnership, they would both receive CGT allowances, thus their jointly owned assets could crystalize to double that profit - £23,400 without paying any capital gains tax.
Tom and Jessica have a personal allowance that is not subject to income tax, a personal savings allowance, and a dividend allowance. As Jessica earns significantly less, she pays tax at a much lower rate than Tom; if saving tax was the couple’s main priority, they could invest cash or assets that produce a regular income in Jessica’s name, taking advantage of her personal allowance, personal savings allowance, and a lower tax rate.
If they wanted to invest in dividend-paying investments, they could share the dividends, taking advantage of both their dividend allowances, with investments and dividends above their allowances being in Jessica’s name to make use of her lower-rate tax status.
How we can help
Don’t wait until it’s too late. Being organised and reviewing all your plans to protect you and your partner is of vital importance. We can provide a full review to ensure you make the most of your savings, your family is protected financially and give you peace of mind when it matters the most.
If you would like to arrange an initial free no-obligation meeting you can email us: firstname.lastname@example.org or give us a call on 0141 572 1340.
Source: Tax Doctor: cohabiting couple consider civil partnership to protect wealth, Old Mutual Wealth , October 2018.