Living together and not married? Find out why a cohabitation agreement could make sense

It’s a common misconception that people living together are protected by ‘common law’ if they separate and need to untangle their belongings and finances. But this isn’t the case. You don’t have automatic rights and you can end up in a really desperate situation. So while discussing legal documents is a real passion killer, particularly ones designed to protect you when a relationship ends, increasing numbers of people are drawing up cohabitation agreements. They can also play a vital role if someone dies.

To find out more, we spoke with Marika Franceschi, a partner at MacRoberts LLP, and Taina Moran, a financial planning director from Evelyn Partners' Edinburgh office.

What is a cohabitation agreement?

Taina: It’s a legally binding agreement that gives a couple who live together certain rights so that they can make a financial claim in the event of separation or death. Essentially, it’s the mechanics behind the division of assets.

Marika: It’s an agreement entered into between two people who have chosen to live together as if they are in a marriage or civil partnership, but the crucial point is that although they are living this way, they are not married.

Why do people need one?

Taina: Most cohabitants don’t realise that they don’t have the same rights as people who are married. Cohabitants do not have any automatic rights to claim anything. This means that if you moved into a property owned by your partner (i.e. the property is in their name), you could be paying part of a mortgage but you don’t have any rights to the property if you split up or if your partner died.

Marika: Cohabitation agreements give people a sense of certainty. Setting up an agreement is often motivated by buying a property together and perhaps one of the parties has put more money in towards the deposit or one is going to be paying more towards the mortgage or the cost of renovations. They want to know that if they were to separate, this would be dealt with fairly. Sometimes even if people are contributing equally, they still want to have a cohabitation agreement to avoid the risk of arguments if they split up.

Cohabitation agreements can take away a lot of stress. If you separate or one of you dies, it’s an emotional time anyway and the last thing most people want is to get solicitors involved. The agreement should make it clear what belongs to whom from the outset and how any communal assets will be dealt with on separation or death.

How do I set one up?

Marika: Via a solicitor. Both parties have to be separately represented to make sure their solicitor is acting in their best interests only. Each party tells their solicitor what they would expect to happen in the event of separation or death and then an agreement is usually reached after some discussion and compromise on both parts.

Ideally, a couple would have the agreement in place before living together but it’s not essential. They can already be living together when they put an agreement in place.

Can I set one up on behalf of my son or daughter?

Taina: Firstly, it’s important to say here that without the help of the bank of mum and dad or grandma and grandpa, it’s almost impossible for younger generations to get onto the property ladder. I work with a lot of parents and grandparents who want to gift large sums of money in order to help with this.

By using cashflow modelling, I check to see if they can afford to make a gift and look at the best way to structure it. Sometimes, people give money from their pension tax-free cash entitlement. I look at what the tax implications are if they’re doing this as they could end up paying more tax themselves.

I also see parents raising money for their child’s deposit by increasing their own mortgage. If they go down this route, they have to have a legal agreement in place confirming that the money raised is an irrevocable gift.

People go to great lengths to help their children financially, so it’s only natural that they want this money to be protected. If you are gifting money, you can suggest to the recipient that they draw up a cohabitation agreement, but they don’t have to.

I have had clients who have suggested this, but the recipient has refused. As a financial planner, I can help in this situation. If someone gives money to their child or grandchild and wants to make sure it remains theirs, we can put money into trust and then loan it from the trust to help purchase a property. There are ways to protect the money despite not having a cohabitation agreement in place.

Marika: Parents tend to encourage their child to draw up a cohabitation agreement when they are giving away large sums of money towards a property purchase. Couples are often caught up in the happiness of moving in together and don’t like to think about things going wrong. Some of them find it difficult to raise the subject with their partner because they don’t want to offend them and don’t want them to think that they are even contemplating separating. Parents might take a longer-term view and they are not as emotionally involved with the relationship as their child is. They’re often thinking about the next generation of family who will come along in the future and how to protect the money for them.

That being said, in my experience, while some cohabitation agreements are driven by parents, an equal amount of couples come to me of their own initiative, wanting to put one in place.

How are assets divided in the event of a separation?

Taina: With a cohabitation agreement in place, all assets, including a house, are dealt with as per the agreement. Without, if there is a house involved which is in joint names, it would most likely be sold and the sale proceeds would be split equally. This is fine if you both paid an equal amount towards the property.

It gets complicated if different amounts were paid. For example, one person might have contributed £50,000 towards the deposit and the other person £25,000. With an agreement in place, you can make sure that you get back what you are entitled to rather than just an equal, and perhaps unfair, split.

Marika: Without a cohabitation agreement, cohabitants don’t have an automatic claim to assets which have been acquired during the relationship and without their ex-partner agreeing to share assets, they can only make a claim for compensation if they can prove they have suffered economic disadvantage during the relationship. Even then, they have to apply to the court within one year of separating and it can be an expensive and risky process. By contrast, spouses have an automatic right to share in any assets acquired during the marriage, including pensions, savings and investments. For cohabitants to share in assets acquired or jointly contributed to during the relationship, this would have to be outlined in a cohabitation agreement. The exception to this would be property bought in joint names as in that case both parties would have rights to share in the property by virtue of their name being on the title.*

What if children are involved?

Marika: Some people ask for a clause to be added into the agreement to say that the other party will provide maintenance for any children that come along. This doesn’t make any difference legally as providing maintenance for a child is not something you can opt out of. For some people though, it gives them greater peace of mind seeing it written into an agreement.

Where it does make a difference though is if one party has suffered economic disadvantage during the relationship for the benefit of the family. For example, if one party gives up work or reduces their working hours to look after children, they are likely to be worse off financially than their partner who has continued to work full-time. They are likely to earn less, progress less quickly in their career and pay less into their pension than if they had continued to work full-time and without any breaks.

Financial provision for the person who has suffered economic disadvantage can be written into a cohabitation agreement either before children come along or after they are born or adopted.

This non-economic contribution is formally recognised for married couples but not for those cohabitating. Without a cohabitation agreement, economic losses sustained would have to be quantified through the courts.

It can be extremely humiliating for someone to justify how they have spent their money over several years and the contributions they have made to the household. When people are happy in a relationship, they don’t necessarily keep track of what they’re doing and what contributions they are making. To expect someone to go back in time and capture this information is very difficult. With an agreement in place, they don’t have to.

What happens if you get married?

Marika: I would always advise that a new agreement is drawn up before getting married – a prenuptial agreement. The cohabitation agreement would then be superseded. While some of the provisions can be transferred from one agreement into the other, you need to look at its contents with fresh eyes and with matrimonial legislation at the forefront of your mind rather than cohabitation legislation.

Taina: When circumstances change, it is always important to plan ahead from a financial and legal standpoint to protect yourself. As a financial planner, I cannot stress enough the importance of drawing up a prenuptial agreement. Whether you’re entering marriage for the first time or remarrying, a prenuptial agreement will clarify your financial situation in the event of death or separation. I have worked on divorce cases with these agreements and they are so much more straightforward than those without and can take away a lot of uncertainty and emotional turmoil.

Talk to Evelyn Partners about your finances

Significant life events, like moving in together, are often the catalyst for people to review their finances and future goals. A financial planner, like Taina, can help you make sound financial decisions that will help to protect you both now and in the future.

At Evelyn Partners, we offer a free initial consultation with a financial planner where you can talk about your circumstances and find out more about how we can help you. Book online now or call us on 020 7189 2400.

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*Please note that this paragraph is only applicable to Scotland and the legal position on the division of assets differs across the UK. Please contact a solicitor within your country of residence for more information on how your assets would be divided in the event of a separation.