Modern relationships in a changing legal landscape – Why planning matters more than ever for cohabiting couples

The government recently announced its open consultation entitled “A fairer end to relationships”, and with that announcement it signposted what could be some of the most significant reforms to the law governing unmarried couples and their financial relationships.  It brings together two areas for potential law reform so far as unmarried couples are concerned:

1. Reforming the law for cohabitants on separation; and
2. Reforming the law for cohabitants on intestacy.

For many high and ultra-high net worth individuals, cohabitation is an increasingly common choice, whether as a precursor to marriage, an alternative to it, or within second or later-life relationships. However, the legal framework in England and Wales has not kept pace with social change.  In his foreword to the consultation paper, Rt Hon David Lammy MP Deputy Prime Minister, Lord Chancellor and Secretary of State for Justice, referenced the statistic that over 3.5 million couples live together without getting married or entering a civil partnership.

Whilst the recent announcements from the Government indicate that reform is now firmly on the agenda, but how long this will take and what that may look like, remains uncertain.  For the time being, the current position remains materially unchanged and means that advance planning is essential.

The current legal position: limited protection and common misconceptions

Despite widespread belief, there is no legal concept of a “common law marriage” in England and Wales. Cohabiting couples do not acquire rights by virtue of living together, regardless of duration.

The consequences can be significant:

• There is no automatic entitlement to share in a partner’s assets, including property, pensions or savings, on separation.
• There is no right to spousal maintenance.
• There is no automatic inheritance under the intestacy rules.

Instead, disputes between cohabitants are determined through navigating the often-complex interplay of the law on trusts, property, and inheritance laws.  Where there are children of unmarried couples, the financial provision for those children falls under the provisions of Schedule 1 of the Children Act 1989.

Property ownership: legal v beneficial interests

The distinction between legal ownership and beneficial ownership is central in cohabitation disputes. The legal owner is the person named on the property title. Beneficial ownership reflects who is entitled to the value of the property. These interests are not always the same. Where ownership arrangements are unclear, disputes often have to be resolved through complex trust and property law principles rather than family law. For example, where one person sells their home to move in with their partner, and uses their monies to fund home improvements, whilst their partner remains the sole legal owner of the property.  Has the partner who moved in, gained a beneficial interest?  The answer may not always be straightforward, and the in the absence of an express agreement, such issues can quickly spiral into complex and costly litigation.

Declaration of trust – providing certainty in property arrangements

A declaration of trust is often the most effective way to mitigate against uncertainty. It records the parties’ respective interests in a property, how sale proceeds will be divided and what should happen if one party wishes to exit the arrangement.

For HNW and UHNW clients, this can be particularly important in circumstances where family wealth has been relied upon, or where one party contributes significantly more to the purchase price, and/or where complex funding structures are relied upon.

A declaration of trust ensures that in the event of a separation, there is a legal starting, and end, point for how the parties will quantify their beneficial interest in the property, and how that interest may eventually be realised.

Cohabitation agreements – broader financial planning

The ‘day-to-day’ practical realities of living together can also be set out in a cohabitation agreement, which may sit alongside a declaration of trust.  Such agreements shift their focus to addressing the wider financial relationships.  The agreement can be as limited or as detailed as a couple may require, or feel necessary.  It can, and often does, expand on how a couple will manage their financial affairs during the relationship, and how they may then separate finances (which may have become intermingled during the course of the relationship), when they separate.

For many wealthy families, a cohabitation agreement is a sensible risk-management tool rather than an indication that the relationship is expected to fail.

Children: a significant exception to the general rule

Whilst cohabitants have no equivalent to the financial claims available on divorce, the birth of a child can introduce a materially different legal dynamic.

Where unmarried parents separate, the financially weaker parent may be able to pursue financial provision on behalf of a child under Schedule 1 of the Children Act 1989.  This is not to be confused with a claim being made for the financial benefit of the parent of a child; the focus is entirely on meeting the financial needs of the child.

For families with substantial wealth, Schedule 1 claims can be far-reaching. The court has the ability to require the provision of a property for the benefit of a child until they are no longer a minor, (with the important caveat that those same funds will be returned to the paying party when the child is no longer under the age of 18 years old), together with additional capital to support their upbringing, education and wider welfare.

Although such claims are fundamentally child-focused rather than compensatory towards the other parent, they can nevertheless have significant implications for wealth preservation and estate planning. The absence of a marriage does not, therefore, eliminate the potential for substantial financial claims arising from family circumstances.

For individuals bringing significant assets into a cohabiting relationship, particularly where children are anticipated or already part of the family unit, careful planning at an early stage is often prudent. Consideration should be given not only to cohabitation agreements and declarations of trust, but also to how property, trusts and wider family wealth structures may operate in the context of future claims on behalf of children.

For those with significant incomes (as a rule, any parent earning over £156,000 per annum), the claims for income provision for their child is not limited to simply an assessment by the Child Maintenance Service.  Understanding how the family’s income is managed and generated is a key factor, especially if that income is generated from family trusts or generational wealth.

Looking ahead

The Government’s consultation may herald the most significant reform of cohabitation law in decades.  Whether or not reform follows, the current position remains unchanged. For individuals entering into a cohabiting relationship, particularly where there are substantial assets, family wealth or complex property arrangements, careful planning remains the best way to achieve certainty and avoid costly disputes in the future.

How we can help

If you’re in a cohabiting relationship and want to understand your legal position, or need advice following a separation, our family team is here to help. Get in touch to discuss your options and how we can support you.