Record 9 out of 10 couples now cohabiting before marriage

The Office for National Statistics today revealed a post-Covid recovery in marriage rates. There were 246,897 marriages in England and Wales in 2022, a return to pre-pandemic levels, and 12.3% more marriages than took place in 2019.[1]

The ONS said that the numbers of marriages and marriage rates in 2021 and 2022 may reflect a recovery after Covid rather than a long-term trend. 

Ben Glassman, Financial Planning Partner at leading UK wealth management firm Evelyn Partners, notes that the data also reveals cohabitation prior to marriage has substantially increased over time:
“In 2022, the highest levels of cohabitation prior to an opposite-sex marriage were recorded with 9 in 10 couples having previously cohabited. This compares with 59.6% of couples having cohabitated prior to marriage in 1994. Levels of cohabitation prior to same-sex marriages in 2022 were even higher than those in opposite-sex marriages.” 

January 2024 data from the ONS also showed that for the first time in 2021 less than half of adults in England and Wales were married or in a civil partnership.[2] The total number of cohabiting couples has increased from around 1.5 million in 1996 to around 3.6 million in 2021, an increase of 144%.[3]

“All this suggest that many more couples are spending a long period cohabiting whether it’s a prelude to marriage or not. Even if they intend to get married, people need to be aware of how the law and tax rules treat couples who live together differently to those who are married, with often fewer rights and benefits conferred than they might think. Labour has promised in its manifesto to ‘strengthen the rights and protections available to women in co-habiting couples’ – but it’s not at all clear what this might entail and efforts by Labour to make material changes here could be fraught with difficulty.

“Those who do get married, meanwhile, can often do themselves a favour by recognising some of the tax advantages that come their way as a result.”

Glassman notes that not all couples want to combine their finances: “It’s understandable that some individuals might be averse to intertwining their finances with those of another, whether they are married or not – and some of those going through divorce might lament that they ever did. But couples can still look to put in place important cohabitation agreements in these circumstances.”

Here Ben Glassman notes some of the differences in financial and legal status between cohabitation and marriage.

A civil partnership is a legal relationship entered into by two people which is registered and provides couples with the same legal rights and duties that they would have in a lawful marriage – where we use ‘marriage’ or ‘married’ it’s understood the same rights confer to those in civil partnerships.
 
Legal rights  
  
The basic message to remember is that unmarried or unregistered couples still have no inheritance rights under the intestacy rules, regardless of how long they have been cohabiting – and it will be interesting to see if a new Government takes any steps to change this.

Unmarried and cohabiting partners are not automatically entitled to any of their partner’s property, financial assets, or belongings if they die intestate unless they can be shown to be jointly owned. They do have the legal right to claim against their partner’s estate if they’ve been cohabiting for more than two years, but this could be protracted, stressful and expensive – particularly if there are blood relatives of the deceased with a strong claim under intestacy rules.   
  
Writing a will is in some ways the answer to this but that is something very few unmarried couples do: estimates show that while more than half of married couples make a will, among cohabiting partners it is just 26%. A spouse has an automatic claim to most of their partner’s assets on death, and while this might not be a reason to get married it is another aspect of the financial security that marriage provides, particularly where one partner holds most of the couple’s wealth.  
 
For some cohabiting couples, the best way to protect their assets is to establish a cohabitation agreement when they decide to move in together. A cohabitation agreement can also be established even if you have been living together for a long time. You can add anything you like into the agreement (as long as you both agree to it) and this can help to make sure that you are treated fairly in the event of separation or death. If you decide to get married in the future, the cohabitation agreement can quite easily be turned into a prenuptial agreement.  

Tax 
 
There are several tax benefits to being in a legally recognised relationship which are unfortunately not afforded to cohabiting couples.  
 
Married couples and civil partners can transfer assets such as cash, investments and property between them, without giving rise to any tax liabilities. These “inter-spousal transfers” create numerous tax planning opportunities to maximise the use of two sets of tax allowances. Movement of assets between cohabiting couples is a disposal for capital gains, and possibly inheritance tax, purposes and could negate the benefits of this exercise. 
 
Married couples can make sure they are using their full £40,000 combined ISA allowances by switching investments or cash as required, without any CGT or inheritance tax implications.  
 
A couple can optimise the use of their personal savings allowances so that they minimise tax paid on interest earned. Interest rates on savings accounts have increased rapidly over the last two years, and the allowances have been frozen: basic-rate taxpayers can earn up to £1,000 in interest tax-free, higher-rate taxpayers £500 and additional-rate payers get no allowance. With more individuals falling into the additional rate tax band now that the threshold has been reduced to £125,140, this is more useful than ever for those who have built up cash savings.  
  
Married couples can also switch shares held outside of ISAs between each other to benefit from two sets of annual dividend allowances, which could be particularly beneficial as these have been halved so that only £1,000 of dividends per person can be received tax-free. That halves again to just £500 from 6th April for the new tax year.  
 
They can also reduce or eliminate entirely potential tax on profits crystallised on the sale of assets through using two sets of annual capital gains tax exemptions, which again gains significance this year as the individual CGT allowance was halved again to £3,000 from 6th April 2024.  
  
If a higher-rate taxpayer owns a buy-to-let property, they would pay income tax of 40% on the rental income. If their husband, wife or civil partner is a non-taxpayer, it could make sense for them to transfer the property, as their partner can use their basic personal allowance of £12,570. If the rental income is less than this allowance, it will be free from income tax, and if more than, then only basic rate tax will be paid.  
 
Finally, the annual Marriage Allowance is available to couples where one partner is earning less than the tax-free Personal Allowance of £12,570 per annum and the higher earning partner has earnings between £12,570 and £50,270 (£43,662 in Scotland). The Marriage Allowance enables those eligible to transfer £1,260 of the lower earner’s annual tax-free Personal Allowance to their spouse or civil partner, creating a tax saving of up to £252 a year.  
       
Inheritance tax exemptions and reliefs
  
Unmarried couples can pass on assets valued up to £325,000 tax-free upon death (the inheritance tax nil rate band), but anything above this is potentially subject to 40% IHT. It is important to note that the IHT bill will have to be settled before probate is granted and the surviving partner may not have the assets outside of the conjugal home to pay this tax liability. So, if a partner is left a share of their jointly owned house that far exceeds this value, they could end up having to sell it to pay the tax – an unwelcome prospect at a time of bereavement.[4]  
  
However, a deceased spouse or civil partner can pass an estate of any worth to the surviving spouse without immediate tax consequences. Furthermore, any IHT nil rate band that is unused by the deceased can be passed on for the spouse for their use in the future - creating a potential nil rate band of £650,000 for the survivor. Furthermore, the Residence Nil Rate Band (RNRB) can also be passed between married spouses to enable them to potentially claim a further IHT exemption on the value of the family home, enabling married couples to pass on greater amounts of assets tax efficiently where there are children. This means that a married couple could potentially pass on an estate of up to £1m tax-free.   
  
Marriage also has potential benefits when it comes to making gifts to your loved one during your lifetime. Where an individual makes a gift of capital or assets to another individual, over the value of their £3,000 annual gift allowance, during their lifetime, it may be classed as a Potentially Exempt Transfer and, should death occur within seven years from the date of the gift, the beneficiary may be liable to IHT. That could be a nasty surprise if they don't have the resources to pay the tax. However, gifts between spouses or civil partners are not Potentially Exempt Transfers – they are ignored for IHT purposes altogether. Also, a married couple can gift to others up to £6,000 per annum without the gifts being considered as a PET.   
  
As only very rarely are income and savings split equally between spouses, the Government allows a surviving spouse to effectively inherit the ISA savings of their deceased partner and maintain their tax-efficient ISA status. The surviving partner will receive an extra ISA allowance known as an additional permitted subscription. This is equal to the value of the deceased's ISA holdings at the date of death and is in addition to the surviving person's own annual ISA allowance. This is not permitted between any other individuals.  
   
 
NOTES  
[1] Marriages in England and Wales - Office for National Statistics (ons.gov.uk) 
[2]  https://www.ons.gov.uk/peoplepopulationandcommunity/populationandmigration/populationestimates/bulletins/populationestimatesbymaritalstatusandlivingarrangements/2022 
[3] https://commonslibrary.parliament.uk/research-briefings/sn03372/ 
[4] Where there are children, the couple may benefit from the Residence Nil Rate Band (RNRB) of £175,000, which can mean that together with the £325,000 nil rate band an individual can pass assets up to £500,000 tax-free upon their death.  The RNRB is only available when the family home is passed to children or grandchildren on death and the allowance is restricted or eliminated if the deceased’s estate is worth over £2m. 

ENDS 
 
Evelyn Partners is the UK’s leading integrated wealth management and professional services group, created following the merger of Tilney and Smith & Williamson in 2020. With £59.1 billion of assets under management (as at 31 December 2023) we are one the largest UK wealth managers and are also the seventh largest UK accountancy firm ranked by fee income (source: Accountancy Age 50+50 rankings, 2023). Evelyn Partners was named Accountancy Firm of the Year in the 2023 City AM Business Awards.   
 
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Disclaimer
 
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
 
Issued by the Evelyn Partners group of companies (the “Group”) which comprises Evelyn Partners Group Limited and any subsidiary of Evelyn Partners Group Limited from time to time.