Living together as a couple before, or as an alternative to, marriage is now the norm. Between 2004 and 2016 the Office of National Statistics reported that ‘cohabiting couple families’ were the fastest growing family type. For these couples, property ownership aspiration remains high. Competitive mortgage deals and a rising property market means getting on the housing ladder is a top priority. But, in the excitement of buying together sometimes important decisions which offer protection to both parties get overlooked. Couples who live together very often fail to set out their rights by means of a written declaration of trust, even where the default legal position is unlikely to reflect their intentions, or their respective contributions to the costs of purchasing the property.
There are important legal questions to consider, each with far reaching consequences:
- Whose name should the property be purchased in to ensure both parties’ contributions are protected?
- What will happen in the event of a future separation?
- What would happen in the event one party dies and who would be liable pay any taxes due?
Couples often want to buy jointly. In England there is a distinction between legal ownership (the names on the title deed registered at the land registry) and beneficial ownership (the ownership of the underlying equity in the property). The legal owners will hold the property for the benefit of the beneficial owners (who may be and usually are themselves).
There are two distinct ways of jointly owning a property. Parties can hold an interest as a joint tenant or as a tenant in common.
In the case of a joint tenancy each co-owner can only have an equal interest in the land, or in its net proceeds of sale if it is sold, whereas in the case of a tenancy in common, it is possible for one owner to have a greater or lesser share than the other co-owner(s). For this reason, when people contribute to the purchase price of land in unequal shares, the beneficial ownership should normally be in the form of a tenancy in common, unless they are content to accept the equality of interest created by a joint tenancy.
It is advisable to sign a declaration of trust as part of the purchase process to identify who has contributed what and this mirrors the share belonging to each party.
Sometimes a parent of one party assists with monies towards a deposit. These loans are likely to remain unsecured and so it is vital that a written agreement acknowledges the terms of any loan and who is responsible for repayment and what the triggers are for repayment upon demand.
Buying in a sole name
Where property is occupied by an unmarried couple who are living together but it has been purchased in the sole name of one of the parties, the entire value of the property will strictly belong to that party unless there is a declaration of trust in writing setting out the agreed beneficial ownership. Failing that the non-owning party would have to enter court proceedings for a declaration by the court that a special trust (known as a ‘constructive trust‘) operates over the property.
A constructive trust may be inferred if a direct contribution to the purchase price has been made by the person who is not registered as the legal owner, or such a person has contributed to the payment of the mortgage instalments. If, however, the financial contributions run to something less, such as the running costs of the property, they may not be sufficient. To avoid the costs and the uncertain outcome of the Courts parties should put in place a declaration of trust setting out beneficial ownership at the outset.
What can be done to protect parties in the event of a future separation?
The parties should take advice upon signing a comprehensive cohabitation agreement which dovetails the declaration of trust over the property. This would refer to the property interest and importantly set out what agreement would ensue if the couples separated in the future.
For more on cohabitants’ property rights in the event of a break-up, please see here.
What can be done to protect a cohabitant if their partner dies?
Both parties should make a new will. Be aware that any current will they hold will become void in law from the date of their marriage. To avoid this automatic rule, wills can be carefully drafted ‘in anticipation of a marriage’ so they will remain in force.
Under the current ‘Intestacy’ Rules, which apply when someone dies without a valid will, an unmarried partner has no statutory right to any share of the deceased partner’s estate.
If parties own property jointly as tenants in common, or if the property is in the deceased parties’ sole name, then the surviving partner has no entitlement to the share of property that belonged to their partner. Instead, that share will pass to blood relatives under the strict Intestacy Rules and this is likely to result in a forced sale of the property.
The Inheritance (Provision for Family and Dependants) Act 1975 does provide a partial remedy for surviving unmarried partners. If the survivor was, immediately before the death of their partner, being maintained either wholly or partly by their partner, the survivor can apply to the court for reasonable maintenance out of the deceased partner’s estate. This however is a costly uphill struggle and should not be relied upon.
Conversely, if parties decide to hold the property jointly as joint tenants and one party dies, then their share passes automatically to the surviving joint owner by what is known as the survivorship rule. But again, the fact of joint tenancy should not be relied upon as a means of estate planning. Either party can unilaterally sever the joint tenancy at any time, without the need for agreement. It can also be severed by oral agreement or in some cases by conduct.
Inheritance tax (IHT), a death duty, is not favourable to unmarried partners living together. There is no inheritance tax exemption available to assets passing after the death between unmarried parties while there is for spouses. Inheritance tax is levied at 40 per cent of a deceased person’s chargeable estate over the available ‘nil rate band’ (i.e., the amount not subject to tax). The nil rate band for this tax year 2016-2017 is £325,000.
There are certain will structures that can prevent a potential double taxation scenario. This is particularly relevant where there are children to consider. In drafting a will it is vital to factor in an additional IHT allowance called the ‘residence nil rate band’, which is being introduced from April 2017. This will only be available if an individual is passing qualifying property to direct descendants and it does not benefit a surviving unmarried partner.
There is also ability for an individual to make a will directing which part of their estate should bear any inheritance tax. A specific gift of property in a will might be expressed to be made ‘free of tax’ which means that any tax bill relating to the property will need to be met out of the remaining estate and not the property itself . This can prevent the forced sale of a property to pay tax.
In all these cases legal advice should always be sought for tailored to individual circumstances.