Sharan Chaggar, a 23-year-old public relations executive from north London, has just found out there is a third party involved in her relationship with Tim Roberts, her 25-year-old boyfriend. The intruder is the Law Commission and it is about to make Chaggar’s and Roberts’s romance – they have been living together for two years – a lot more complicated.

Later this summer the commission, the government’s legal reform body, is due to publish new proposals that are expected to give divorce-style rights to nonmarried couples if they break up. Some of the details were leaked last week. For Chaggar and Roberts the proposals could mean one of them having to write out a cheque to the other.

“Couples living together is something the government should keep out of,” said Chaggar last week. “It should be up to individual couples to decide how formal to make their relationship.

“If you want to make a bigger commitment you get married – the advantage of cohabiting is that it’s a less formal arrangement.”

The Law Commission’s proposals, experts predict, will see judges and lawyers poring over the bank statements of unmarried cohabitees who break up, even if they have no children. The guiding principle is expected to be that if one person has benefited financially from the relationship – for instance by building their career while the other looks after the home – the richer party will have to compensate the poorer one.

The legislation has been proposed to protect women’s rights in an age where up to 2m established heterosexual couples live outside the protection of marriage. But unlike the “gay marriage” legislation introduced in 2005, the new law would bite even where no ceremony had taken place.

All this, believes Robert Whelan of Civitas, the centre-right think tank, will ultimately mean fewer people pairing off. “It’s a complete disaster – it will just put people off forming relationships. I think it will just end up with more people living on their own,” said Whelan.

What is puzzling about the government’s urge to become even more intimately involved in the lives of lovers is that its track record in the area is patchy at best.

Last week Frank Field, the Labour MP and expert on welfare reform, produced a new analysis of how the government’s complicated tax credits and benefits system affects different types of family.

Field found that the system “brutally discriminates against two-parent families”. Startlingly, Field showed that while a lone parent with two children has to work 16 hours a week on the minimum wage to earn £487, a couple with two children would have to slog away for 116 hours.

“I can’t believe the government, when it set out, thought this would be the effect,” said Field, adding that there is now a “huge disincentive” for single parents to find another partner, because to do so would incur a large drop in income for both of them.

“There is also a disincentive for two-parent households to tell the truth,” said Field, noting that last year it had emerged that the government was paying tax credits or welfare benefits to 2.1m lone parents – 200,000 more than its own official figures said exist.

While people in receipt of benefits might find it useful to pretend they are not part of a couple for tax reasons, others further up the income scale are still finding plenty of reasons to get married – both financial and emotional.

For Eleanor Lock, a 36-year-old media executive, the divorce of her parents had made her firmly antimarriage, but five years after moving in with her boyfriend she decided to marry him.

“When I was pregnant with my first baby,” said Lock, from London, “I realised the financial and legal complications of not being married. It dawned on me that if I died, my partner would be left with an inheritance tax liability and might not even win the right to look after our kids.

“Now I think it’s wonderful that we’re married. It’s like all the options are closed off, but that’s a good thing.”

There is general consensus that children have far better chances in life if they are brought up by two parents. But organising the tax, benefits and divorce system in a way that encourages lasting unions while remaining cost-effective is fraught with problems.

The system we have now is clearly inconsistent. The question is: how best might it be reformed?

If Tony Blair and Gordon Brown have done little to support marriage, neither have their predecessors in recent decades. Back in the late 1980s Nigel Lawson, the then Conservative chancellor, decided to remove the single most obvious tax incentive for marriage – the married person’s tax allowance, which applied to married men only.

Lawson initially planned to replace the allowance with a transferable tax allowance that would end discrimination against women, as under the new scheme, unused allowances could be transferred between spouses. However, after Lawson had axed the existing scheme, the recession intervened and the new proposals were never enacted.

Whether Lawson’s transferable tax allowances could have done much to stem the decline of marriage is debatable. The law reforms in 1969 had already made divorce much easier.

As Graeme Cooke, of the Institute for Public Policy Research, the centre-left think tank, puts it, even when marriage was “privileged through the tax system, divorce rates went through the roof”.

In the early 1970s, 68% of the population was married, but by 2001 this had dropped to 54% and is projected to decline to 41% by 2031. Nearly 50 years ago, 90% of children were still living with both their parents at 16; now about one in three experiences the separation or divorce of their parents before that age.

After such a profound change in the kind of commitment that parents show each other – and their children – many, such as Iain Duncan Smith, the former Conservative leader, have linked this to wider social problems.

“Family breakdown is one of the great drivers for underachievement in children,” said Duncan Smith. His think tank, the Centre for Social Justice, has produced figures to back up his claims: children who have experienced family breakdown are 75% more likely to fail at school, 70% more likely to be a drug addict and 35% more likely to be unemployed.

Labour’s strategy has been to take a “relationship neutral” approach and concentrate benefits and tax breaks on the poorest families with children, without regard to the marriage status of their parents.

This strategy has had perverse effects, largely because the poorest children tend to belong to single-parent families.

“There are now no poor children in single-parent households where the mother works full-time, but in two-parent households, where at least one adult works full-time, there are 1.2m,” Field noted last week.

Despite the lack of an income tax break to make marriage more attractive for these lower income groups, there are still financial benefits to marriage for the middle classes.

Inheritance tax does not apply on transfers to widows and widowers, but kicks in at 40% above a £300,000 threshold for the unmarried on bequests from a companion. Pension rights also tend not to be as generous for unmarried couples and unmarried fathers do not have automatic rights of access to their children.

Next month Helen Westwell, a 42-year-old marketing executive, is set to marry her companion with whom she has been living for 23 years. The couple have four children.

“We met at university, moved in together and just never felt the need to get married – we are not religious and never felt the need for the legal status,” said Westwell.

“The reason we are doing it is basically financial. If one of us were to die, the other would be left with an inheritance tax liability.” Does she welcome the new proposals that would give cohabiting couples divorce rights? “No, because they miss the point. One of the nice things about not being married is that there is no one to interfere in your relationship. You can split big things like property ownership anyway.

“The problem is the inheritance tax issue and the new proposals don’t tackle that.”

The details of the proposals will reveal how many couples will be caught by its provisions. It is expected that settlements will be larger when children are involved. A key question is how long a relationship will need to have lasted for a dumped person to apply for money.

The Law Commission’s aim, believes Jill Kirby, an expert on family policy with the Centre for Policy Studies, a right-wing think tank, is to give redress to those who mistakenly believed that a live-in relationship gave them rights upon a break-up: “But from a legal point of view it’s a very unattractive path to follow, because it imposes a contractual obligation on parties who have not freely entered into it.”

More broadly, Kirby believes that “just as smoking is a bad thing and should be highly taxed, marriage is a good thing and should be lightly taxed”. Little can be expected from Brown in that regard, but David Cameron has hinted that he may pledge practical support for married couples.

For his part, Field insists that he does not want to see benefits and tax credits taken away from single parents to correct the bizarre anomaly he has found. Instead he wants new money to flow to poorer households where both parents work: “All I’m saying is that we should have equality for two-parent households.”

THE UPSIDE AND DOWNSIDE OF GETTING HITCHED

PROS
Asset transfers between spouses are exempt from inheritance tax and capital gains tax. An unmarried couple would have to pay tax at 40% on all assets above the first £300,000 in the event of one of them dying.

Many company pension schemes favour married couples. For instance, most schemes will pay a regular “widow’s” pension to the husband or wife of an employee who dies, but some will not make payments to unmarried partners however long they have been together.

Divorce laws give strong financial protection to nonworking spouses. The starting point on divorce is that jointly accumulated assets should be split 50/50. The courts can also distribute future income.

Married couples are more likely to stay together. Nearly one in two cohabiting couples split up before their first child’s fifth birthday, compared to one in 12 married parents. It’s not clear if this is a function of the institution of marriage itself or the circumstances of many unmarried parents.

CONS
Married couples can only have one “principal” and untaxed private residence – unmarrieds can have two, and thus enjoy twice the tax advantages.

For those at the bottom end of the income scale, the tax credit and benefits system means there are clear financial incentives for living alone. A lone parent with two children has to work 16 hours a week on the minimum wage to earn £487, a couple (married or not) with two children would have to work for 116 hours.

The average cost of a wedding is now around £20,000, according to figures compiled by Wedding Magazine.

Students with divorced or separated parents may be able to engineer things to get larger grants and loans. This is because the level of awards is decided on the income of the parent with whom they are living.

The very wealthy complain Britain’s divorce laws can be too generous and encourage gold digging.

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