Nine key financial planning issues couples could face under potential new cohabitation rules

The Government's 'A Fairer End to Relationships' consultation, which closed on 14 August, proposes giving many cohabiting couples significantly stronger legal rights on separation and death, while stopping short of equating cohabitation with marriage.

According to the latest official Office for National Statistics family and household statistics, there were around 3.5 million cohabiting couples in the UK in 2024, accounting for nearly 18 per cent of all families.[1] Cohabiting couples are now the fastest-growing family type in the UK.

Lucie Spencer, Partner in Financial Planning at wealth management firm Evelyn Partners says: 'If enacted broadly as proposed, these reforms would represent the biggest shift in the financial position of unmarried couples in England and Wales for decades, with major implications for many of these households, which now must number nearly four million.

'A number of financial planning issues would arise and couples should be prepared to review their financial arrangements, with an increased focus on Wills, property ownership, pensions, cohabitation agreements, succession planning and asset ownership and protection.

'While the proposals aim to provide greater security for financially vulnerable partners, they would also reduce the legal distinction that currently exists between long-term cohabitation and marriage in several critical areas. It would mean that those co-habiting couples who had made a conscious decision not to get married and to keep their finances entirely separate need to be aware of what any new rules mean for them.'

What is being proposed?

The consultation suggests that qualifying cohabiting couples - potentially those who have lived together for at least three years, or who have a child together - could gain rights to seek financial remedies when relationships end. Possible remedies include property adjustment orders, lump sums, pension sharing and, in limited circumstances, maintenance.

The Government is also consulting on granting surviving cohabitants stronger inheritance rights when a partner dies intestate. Here, Lucie Spencer outlines the major financial planning considerations at stake.

1. Ownership of assets

Lucie says: 'We could be seeing the end of the principle of "what's mine is mine, what's yours is yours". Currently, many unmarried couples assume assets held in one partner's sole name remain theirs if the relationship ends. Under the proposed framework, courts could gain the ability to redistribute assets to meet certain needs, even where legal ownership is clear.

'While this is obviously and laudably aimed at protecting the financial security of a less-wealthy partner – often the woman, who might have sacrificed financial independence to look after children, for instance – there are implications. It could give rise to uncertainty over ownership of homes and investments, and more scrutiny of financial interdependence during a relationship.

'It would increase the importance of documenting contributions to property and household finances, and financial planners may need to treat long-term cohabitation more similarly to marriage when assessing financial risks.'

2. Cohabitation agreements take on new importance

Lucie says: 'If the government adopts its preferred "opt-out" model, eligible couples could automatically enter the new legal regime unless they formally opt out. That means cohabitation agreements may become the equivalent of a pre-nuptial agreement for unmarried couples.

'Clients may wish to clarify ownership of property, responsibility for debts, treatment of inheritances, and division of assets on separation. We can see the demand for legal and financial advice in this area, under such a new regime, increasing substantially.'

3. How a property is owned matters even more

Lucie says: 'The family home is usually the main concern of many cohabiting couples and for many would present the main concern under a new framework.

'Clients and advisers might need to revisit questions like: is the property owned as joint tenants or tenants in common? Are unequal contributions being recorded? Has one partner funded the deposit? Is there a declaration of trust?

'Even if reforms are narrower than divorce law, homeowners may find sole legal ownership provides less protection than many currently assume.'

4. Pension planning could become more complex

Lucie says: 'One of the most significant proposals is the possibility of pension sharing orders for qualifying cohabitants on separation. Most people currently view pensions as largely protected outside marriage, so that is a big assumption that might have to change. It could change the financial implications of – and calculations around – separation, and the saving strategies and retirement planning of both partners.

‘Currently there is a big incentive, in the form of pension tax relief at the marginal rate, for the higher earner to focus on pension saving, as the lower or non-earner does not get the same tax benefit. Would that tendency change under new cohabitation rules, or be reinforced? It is unclear, but if a pension is a potentially shareable asset on separation, it is bound to make people think twice about the savings they accumulate as a couple – possibly in a helpful way.

'However, we know from many divorce cases where there is a big asymmetry in pension wealth, it's not always been straightforward for the less-wealthy partner - usually the woman - to get that weighed properly in the financial settlement, especially if they don't take legal and financial advice.’

5. Estate planning and wills become critical

Lucie says, 'Perhaps the biggest practical consequence concerns death and inheritance.

'The issue of cohabitees’ inheritance rights was thrown into the media spotlight recently by Ricky Gervais revealing that he feels forced to get married to his partner of more than 40 years in order to benefit from the spousal exemption and avoid a big IHT bill. We have seen some stressful cases over the years where a terminally ill person has to marry their long-term partner so that the partner can stay in the home, as otherwise they would face an IHT bill that would force them to sell-up.

'Crucially, the proposals do not mention extending the spousal IHT exemption to cohabitees but do suggest giving surviving cohabitants stronger rights where a partner dies without a Will. A surviving cohabitant might in a new regime inherit the home automatically on intestacy, but if the law is changed without a corresponding change to the IHT rules, the inherited estate could still face an IHT bill. In a cash-poor, asset-rich estate, that could still force the survivor to sell or mortgage the property to raise funds.

‘So this might remedy cases where the surviving partner in a long-term unmarried couple finds that they are not entitled to an inheritance that they had expected and were relying on, although there can in certain circumstances already be some recourse when this happens. The proposals should offer better protection for financially dependent surviving partners, and reduced risk of partners being left homeless or financially excluded on the death of their partner.

'However, there is a risk of potential conflicts between surviving partners and children from previous relationships, and more uncertainty over intended inheritances, with the possibility of more disputes over Wills. As a result, having an up-to-date Will could become even more important. Individuals who want to pass on assets in a particular way would – as now - be unwise to assume that the rules of intestacy will work in a way that will keep all their loved ones happy.

‘Finally, unspent pension assets will be included in inheritance tax calculations from next April, and even in a new cohabitation regime, it’s likely that couples would not benefit from the spousal IHT exemption, which means that the surviving cohabitee, or the children if they are nominated as beneficiary, would – as they do now - face a tax bill on the inherited pension funds.’

6. Blended families face particular challenges

Lucie says: 'Many cohabiting couples are in second or later relationships, often with children from those previous relationships, and in such cases a review of several financial decisions and arrangements would become even more essential.

'Life insurance and pension death-benefit nominations would need to be checked. Wealthier families who had put trust structures in place would probably need to get them reviewed. But most importantly they would need to consider plans for their estate at death and whether they want to pass on wealth to children from previous relationships.

'If cohabitants acquire stronger statutory rights, balancing the interests of a current partner, and possibly young children, with those of adult children could become more difficult.'

7. Business owners must be mindful

Lucie says: 'Entrepreneurs and company directors may be particularly exposed under a new legal regime. Potential issues include claims against business assets, valuation disputes and shareholder agreements.

'Succession planning is often hugely important to family businesses, even more so since the restrictions to IHT reliefs that have been in place since April, and cohabitation rights could demand a review of plans currently in place. This could become a major issue for owners who have deliberately remained unmarried partly for asset-protection reasons may need to reassess their structures if reforms proceed.'

8. Tax remains an important distinction

Lucie says: 'One crucial point is that the consultation is largely about family law and inheritance rights, not tax harmonisation. Marriage and civil partnership would continue to offer valuable tax advantages such as the spousal inheritance tax exemption, transferable nil-rate bands, marriage allowance and no-gain, no-loss interspousal transfers.'

9. The awareness issue

Lucie says: 'It seems likely that any new framework would confer new rights on couples after they have cohabited for a certain period – say, three or five years – or have a child together, for instance. That means couples will have to be aware that their financial responsibilities and commitments could undergo a sudden shift at a certain point in their relationship.

'At a basic level this demands an understanding of when and how that happens under any new rules, but as we know from some of the misconceptions we observe over the current legal status and rights of unmarried couples, that's not always there.' 

[1] Families and households in the UK - Office for National Statistics