Civil Partnership Tax Implications

Rebecca Steinfeld and Charles Keidan are celebrating their recent win in the Supreme Court.  By a unanimous vote, the 5 judges ruled that the Government’s refusal to allow opposite sex couple couples to have civil partners was ‘incompatible’ with human rights law.

“Wait and see” policy

Everyone agrees that this is discrimination, but the Government says it’s acceptable to treat different groups of people in different ways while they make up their minds, over a number of years.  If this case can establish that a “wait and see” policy is a breach of rights, it could help lots of other people facing discrimination to challenge unfair delays by the Government.

So what’s all the fuss about?

A civil partnership ceremony does not require vows to be exchanged and civil partnership certificates include the names of both parents of the parties, not only the fathers of the parties.  There is no mention of consummation of a civil partnership.  The dissolution of a civil partnership is also not the same as a divorce in that civil partners cannot rely on adultery as a factor for the irretrievable breakdown of the relationship.In this remarkable case, Rebecca and Charles wanted to cement their commitment to each other and wanted to strengthen the security of their family unit.   They wanted to do it in a way which reflected who they are, how they see their relationship and also their roles as parents.  They wanted, in their words, a partnership of equals, without the negative connotations of marriage.Since the landmark legal victory, the idea that a civil partnership could be available to heterosexual clients, as well as same sex couples is looking likely.  The case has proved to be of real significance to family and human rights law practitioners.

Cohabitees in the UK

Currently there are over 3 million cohabitees in the UK with virtually no legal protection.  The opportunity that they could possibly be able to formalise their relationship with a civil partnership will automatically provide the same protections that marriage does. Family law specialists will be keen to see people being removed from a legally problematic area.  Providing a way for couples to commit in a formal and legal way has a drastic impact on their long term financial situation.  Significant tax savings can be made which cohabiting couples simply don’t qualify for.

People who live together vs married couples

People who live together are taxed separately and each person has their own personal allowance entitlement.  However married couples can qualify for the Married Couples Allowance which entitles them to an unused Personal Allowance of up to £1,190 to be transferred to their spouse or civil partner if they earn more. Transfers of assets between cohabitees are subject to Capital Gains Tax.  However, a spouse or civil partner doesn’t have to pay CGT on the transfer of assets between them because they are able to claim spouse exemption, provided that they are living together.

Inheritance Tax Saving

The most significant tax saving is likely to be Inheritance Tax.  Assets left by one spouse or civil partner to their surviving partner or spouse are not subject to Inheritance Tax, because spousal exemption can be claimed. There is no limit to this exemption where both spouses are domiciled in the UK, although there are limits if one member of the couple is not domiciled in the UK.Cohabiting unmarried couples or those not in a civil partnership on the other hand, have to pay Inheritance Tax on everything over the Nil Rate Band (£325,000) passing to their cohabitee. Married couples and civil partners can transfer their unused allowance to be used on the second death, as well as transferring the new Residence Nil Rate Band.

Intestacy

In a situation of Intestacy, a married couple or civil partner will automatically inherit from their spouse or partners estate, although this will be limited if the deceased has children.

A cohabitee will not automatically inherit, unless the property is jointly owned.

Surprisingly there are some negative considerations to marrying or entering into a civil partnership.  For example a married couple or civil partner can only nominate one main residence for principal private residence tax exemption if sold.  Cohabitees each owning a property would not have to do this.

Summary

Charles and Rebecca have achieved their aim of receiving a declaration that the Civil Partnership Act is not compatible with sections of the European Convention on Human Rights.  It is now up to Parliament to act upon this declaration and take action to rectify the situation. If you are a cohabitee unsure of your financial situation looking for professional, impartial advice from an experienced financial planner, contact us now.