Christmas can be a pressure cooker for couples. Every January, family lawyers receive an influx of divorce enquiries as enforced family time and high expectations over the holidays take their toll. However, how a separation affects your finances differs significantly depending on whether you are married or cohabiting.

A common misconception in the UK is that the legal system recognises the concept of a so-called common law spouse. Many unmarried couples believe that if they live together, particularly if they have done so for a long time, or have children together, they will be afforded the same financial protections after a relationship breakdown as married couples. This is not the case.

Unmarried couples have little financial recourse or obligations towards one another if they decide to go their separate ways. Depending on your financial set-up this might come as a nasty surprise or a welcome alternative to often fraught financial negotiations during divorce proceedings.

Either way, if you are cohabiting with a partner, it is a good idea for both of you to have a clear understanding of your financial positions and how your finances will be treated if you separate.

How cohabiting couples are treated

Richard Gilbert, a private client partner at the law firm Spencer West, explains: “For couples who live together, it will all depend on how they regulate their financial affairs and conduct themselves financially during their relationship, irrespective of how long their relationship was for.”

If you have chosen to keep your finances separate during your relationship and have not contributed financially towards anything owned by your ex-partner, then you both should be able to walk away with what you respectively own, Gilbert adds. For couples who are financially equal, this can be a relatively straightforward scenario.

Petronella West, chief executive officer at Investment Quorum, has found that among her client base, cohabiting couples do “tend to have more equal finances” making it easier to walk away if there is a relationship breakdown. They also often make a more conscious effort to keep their money separate, particularly if each member of the couple has their own career.

However, if there is any asymmetry in your finances then you may run into problems. Cohabiting has the potential to “leave one party to the relationship financially exposed” particularly if they do not have “any property or assets of their own”, Gilbert explains.

This can be particularly challenging if one partner has taken on the role of homemaker and stopped working to look after shared children. Invariably in this scenario, there will be a financial imbalance that needs to be addressed when you divide your finances. Either way, it’s important to talk at the beginning of your relationship, returning to the subject after any major life event, about how you both view your financial set up.

How to protect your finances

Once you’ve discussed how you want to approach your finances, both during your relationship and in the event of a break-up, it’s sensible to formalise it via what’s known as a ‘cohabitation’ or ‘living together’ agreement. This records the assets and property each party brings to the relationship, how they will be held during the relationship and what will happen to those assets if the relationship ends. You might also want to include details of ongoing financial commitments post-separation, such as mortgage costs and other bills, to remove some uncertainty.

If there are specific items or properties that you would like to ring-fence, consider setting up a trust. Gilbert says: “While a declaration of trust can be included in the living together agreement, some couples may choose to enter into a standalone declaration of trust which specifically records what their respective beneficial (financial) interest is in that asset or property.”

Having a cohabitation agreement in place can help avoid costly legal disputes and means you are both on the same page when it comes to your respective financial planning. While you can instruct a lawyer if you end up in a position where you need to make a financial claim against an ex-partner, this can be costly. Paying some money upfront to draft a cohabitation agreement may feel like an unnecessary expense, particularly in the first throes of love, but the cost will pale in comparison to legal fees further down the line.

When making your financial plans, it’s important to consider your position both as a couple and as an individual. Jason Coppard, a chartered financial planner at Lumin Wealth, explains: “As there is no guarantee of financial support post-separation, it’s important that assets such as investments and pensions are saved/created by both parties.”

When cohabiting, it is crucial couples do not fall into the trap of one partner taking sole responsibility for the family’s financial planning. Both partners must plan for their financial future irrespective of whether the relationship lasts.

How to split

While you might not have many legal protections following a split, if you have been living together, your finances are likely to be entwined. Often the most difficult element to untangle is who owns what if one partner has made financial contributions to something owned by the other partner.

If one cohabitee financially contributed towards assets or property owned by the other, then they might “acquire a beneficial interest”, Gilbert says. Your legal rights in this scenario will depend on two things. Either what you discussed and agreed when the contributions were made, or whether you put an agreement in place that set out any financial interest acquired if you financially contributed to property owned by your partner.

However, if the property is jointly owned you can run into a different set of problems. “It is very important to get legal advice on how to revert to single ownership as soon as possible,” Coppard warns. If you are in a position where you are going to have to continue to share the property post-separation it is also important to “track and agree a payment structure,” he adds.

Other things to consider are life cover and any other joint insurance you set up as a couple. Speak to your provider about whether you can continue your current cover individually. If not, consider asking your provider for quotes for replacement cover, Coppard adds.

After a separation, the government’s Money Helper service recommends drawing up an agreement that outlines how you and your ex-partner have decided to split your finances. This could set out who owns what, how joint accounts, insurance and bills will be split, and who is responsible for any debts. It can also be an opportunity to informally outline some guidelines about how you will approach providing for any children you share with your ex-partner.

As well as crystallising your decision, this can be a useful document to refer to if there are any future disagreements and provide some much-needed clarity if discussions are conveniently forgotten post-split.